Major transaction and non-exempt continuing connected transactions under the 2020-2022 framework agreement

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your licensed securities dealer or registered institution in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in CSSC Offshore & Marine Engineering (Group) Company Limited, you should at once hand this circular, together with the enclosed revised form of proxy and reply slip, to the purchaser(s) or the transferee(s) or to the bank manager, licensed securities dealer or other registered institution in securities or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or the transferee(s).

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

This circular appears for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities mentioned therein.

中船海洋與防務裝備股份有限公司

CSSC OFFSHORE & MARINE ENGINEERING (GROUP) COMPANY LIMITED

(a joint stock company with limited liability incorporated in the People's Republic of China)

(H Shares Stock Code: 00317)

MAJOR TRANSACTION AND NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS UNDER THE 2020-2022 FRAMEWORK AGREEMENT

Independent Financial Adviser to the Independent Board Committee

and Independent Shareholders

Vinco Capital Limited

(A wholly-owned subsidiary of Vinco Financial Group Limited)

Unless the contest requires otherwise, capitalized terms used herein shall have the same meanings as defined under the section "Definitions" of this circular.

A letter from the Board containing is set out on pages 6 to 44 of this circular. A letter from the Independent Board Committee containing its recommendation is set out on pages 45 to 46 of this circular. A letter from the Independent Financial Adviser containing its recommendation to the Independent Board Committee and the Independent Shareholders is set out on pages 47 to 81 of this circular.

The EGM will be held at Conference Room, 15/F Shipping Building, 137 Gexin Road, Haizhu District, Guangzhou, PRC at 10:00 a.m. on Wednesday, 26 February 2020. Shareholders who intend to attend the EGM are requested to send a written reply, whether in person, by post, by fax to the registered office of the Company at least 20 days before the EGM (i.e. before 6 February 2020). In order to ensure validity, holders of A Shares must deliver the completed proxy form and other authorization documents (if any) to the registered office of the Company not less than 24 hours before the time scheduled for the holding of the EGM (or any adjournment thereof). Holders of H Shares must deliver the completed proxy form and other authorization documents (if any) to the Company's H shares registrar, Hong Kong Registrars Limited at Shops 1712-1716, 17/F, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong, not less than 24 hours before the time scheduled for the holding of the EGM (or any adjournment thereof). Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM should you so wish. Notice of the EGM together with the reply slip and a proxy form for use at the EGM have already been sent to Shareholders.

5 February 2020

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DEFINITIONS

In this circular, the following expressions shall have the following meanings unless the context indicates otherwise:

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DEFINITIONS

"Loans Granted by CSSC Group" the loans advanced by CSSC Finance and/or CSSC Group

• The English names of the PRC entities referred to in this circular are translations from their Chinese names and are for identification purpose only. If there are any inconsistencies, the Chinese names shall prevail.

Certain figures set out in this circular have been subject to rounding adjustments. Accordingly, figures shown as the currency conversion or percentage equivalents may not be an arithmetic sum of such figures. Any discrepancy in any table between totals and sums of amounts listed in this circular is due to rounding.

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LETTER FROM THE BOARD

中船海洋與防務裝備股份有限公司

CSSC OFFSHORE & MARINE ENGINEERING (GROUP) COMPANY LIMITED

(a joint stock company with limited liability incorporated in the People's Republic of China)

(H Shares Stock Code: 00317)

MAJOR TRANSACTION AND NON-EXEMPT CONTINUING CONNECTED

TRANSACTIONS UNDER THE 2020-2022 FRAMEWORK AGREEMENT

1. INTRODUCTION

Reference is made to the announcement of the Company dated 30 December 2019 in relation to, among other things, the terms and the Proposed Annual Caps of each of the Continuing Connected Transactions (save for the Financial Services by the CSSC Group) contemplated under the 2020-2022 Framework Agreement.

Vinco Capital has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders on the fairness and reasonableness of the terms and the Proposed Annual Caps of each of the Continuing Connected Transactions (save for the Financial Services by the CSSC Group) contemplated

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LETTER FROM THE BOARD

In addition, as disclosed in the announcements of the Company dated 7 August 2019, 16 September 2019, 23 October 2019, and the circular of the Company dated 4 October 2019, as CSSC, the controlling shareholder of the Company, is undergoing a strategic restructuring with CSIC. Against such background, the Company proposed to make further adjustments to the Original Major Asset Restructuring Scheme, which includes the proposed disposal of 27.4214% equity interests currently held by the Company in GSI to CSSC Holdings ("Disposal of GSI"), and was subsequently approved at the first extraordinary general meeting of 2019 of the Company on 23 October 2019. After the completion of the Disposal of GSI, GSI will cease to be a subsidiary of the Company and the existing continuing transactions between the GSI and the CSSC Group will cease to be continuing connected transactions of the Group.

Moreover, as disclosed in the announcement of the Company dated 25 October 2019, on 25 October 2019, the Company received a letter from CSSC stating that CSSC had received a "Notice regarding the reorganization of CSSC and CSIC" (《關於中國船舶工業集團有限公司 和中國船舶重工集團有限公司重組的通知》(國資改革(2019)100號)issued by the SASAC, the reorganisation of CSSC and CSIC has been implemented in October 2019 In October 2019, the SASAC has also issued the "Announcement regarding the approval of the reorganization of CSSC and CSIC" (《關於中國船舶工業集團有限公司和中國船舶重工集團有限公司聯合重組 獲得批准的公告》). Upon approval by the SASAC, it was agreed that CSSC performs joint restructuring with CSIC to newly set up China State Shipbuilding Corporation Limited* (中國 船舶集團有限公司) ("China Shipbuilding Group"). The SASAC shall perform the duties of the contributor on behalf of the State Council, and CSSC and CSIC will be integrated into China Shipbuilding Group. In November 2019, China Shipbuilding Group has been established and completed the registration at the State Administration for Industry and Commerce of PRC. As disclosed in the announcement of the Company dated 25 October 2019, upon the restructuring, the controlling shareholder and de facto controller of the Company will remain unchanged. On 8 November 2019, the members of the boards of directors, supervisors and senior management of the China Shipbuilding Group was appointed and the members of the boards of directors, supervisors and senior management of each of CSSC, CSIC and the China Shipbuilding Group were the same. The ultimate beneficial owner of the China Shipbuilding Group is the SASAC as at the Latest Practicable Date. As at the Latest Practicable Date, the restructuring is still on-goingand the transfer of shares of the CSSC from the SASAC to the China Shipbuilding Group and the transfer of shares of the CSIC from the SASAC to the China Shipbuilding Group have not been completed. As such, immediately after the restructuring, the China Shipbuilding Group will hold 100% of the issued shares of CSSC and 100% of the issued shares of CSIC and CSSC will hold 59.97% of the issued Shares of the Company. Hence, the China Shipbuilding Group will become a substantial shareholder and a connected person of the Group and the transactions between the China Shipbuilding Group and the Group will become continuing connected transactions immediately after the restructuring.

The Directors (excluding the view of the independent non-executive Directors who will provide their view based on the advice to be provided by the Independent Financial Advisor of the Company) are of the view that the 2020-2022 Framework Agreement were entered into:

(i) in the ordinary and usual course of business of the Company; (ii) on normal commercial

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LETTER FROM THE BOARD

terms (on arm's length basis or on terms no less favourable to the Company than terms available from Independent Third Parties); and (iii) on terms (including the Proposed Annual Caps) that are fair and reasonable and in the interest of the Company and its shareholders as a whole.

The entering into and the implementation of the 2020-2022 Framework Agreement and the Continuing Connected Transactions (together with the Proposed Annual Caps) contemplated thereunder is conditional upon the approval by Independent Shareholders at the EGM.

1. 2020-2022Framework Agreement

The 2017-2019 Framework Agreement which governs the Continuing Connected Transactions between the Group and the CSSC Group for the period from 1 January 2017 to 31 December 2019 expired on 31 December 2019. To continue the on-going transactions contemplated under the 2017-2019 Framework Agreement, on 30 December 2019, the Company and CSSC entered into the 2020-2022 Framework Agreement to continue and to govern the Continuing Connected Transactions between the Group and the CSSC Group for the period from 1 January 2020 to 31 December 2022.

Principal terms of the 2020-2022 Framework Agreement

Scope: Products and services to be provided by the Group to the CSSC Group:

1. Provision of shipping products, electrical and mechanical engineering equipment, and metallic materials, etc., including shipping products, complete sets or accessories of equipment, steel products, non-ferrous metal products and part of electrical equipment primarily for use on ships, recycling and heavy equipment; when the CSSC Group is facing a shortage in equipment, materials or accessories caused by insufficient procurements, or delay in delivery of goods by suppliers, or when the CSSC Group is urgently required to meet orders from its customers which temporarily exceeded its production capacity in the production of CSSC Group, the Group may provide various equipment, materials and accessories to the CSSC Group to meet its routine and urgent production needs; and sale of waste materials to the CSSC Group; disposing fixed assets that are not in use by the Group to the CSSC Group;
2. Utilities, primarily the supply of wind, water and electrical power and gas; and
3. Provision of production areas and staff quarters leasing service, labour supply and technical services:
4. 1. Leasing: provision of certain production areas and staff quarters leasing service by the Group to the CSSC Group, its joint ventures and associates;

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LETTER FROM THE BOARD

1. Labour supply: primarily involves the provision of training, shipbuilding and ship-repairing services, labour supply etc.; the Group may provide to the CSSC Group the skills training and assessment, technical services, labour supply, etc. relating to the business of the Company; short-term secondment of labour will be provided by the Group when the CSSC Group is in short of labour force for shipbuilding services provided the Group has excess labour force at the same time; and
2. Technical services: mainly involves installation, usage and maintenance services and the provision of shipbuilding products and other engineering design or environmental business, such as land restoration, research and development services and professional services, software development, and relevant technical services.

Products and services to be provided by the CSSC Group to the Group:

1. Provision of equipment for ship, electrical and mechanical engineering equipment, accessories and resources etc., comprising primarily complete sets or accessories of resources, accessories, production machineries required for production, tools and logistic services for ship-building, environmental protection, and heavy equipment production of the Group; when the Group is short of supply of resources, equipment and related services for its production due to insufficient procurements, late delivery by the supplier or temporary demand for the resources, the resources will be provided by the CSSC Group provided that the CSSC Group has excess resources at the same time; and
2. Provision of production areas and equipment leasing service, labour supply and technical services:
3. 1. Leasing: lease of certain production sites and together with necessary production equipment to the Group and the ancillary water and electricity power, etc.;
   2. Labour supply: subcontracting of shipbuilding works by section (or steel structure works), which refers to, in the event that the Group's shipbuilding production is constrained by limited resources, such as workshop, equipment or labour force, such resources will be provided to the Group in order to keep up with the production plan; lease of labour during the peak production season of the Group; and Comprehensive Services;

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LETTER FROM THE BOARD

1. Technical services: the provision of technical services by the CSSC Group mainly involves the provision of shipbuilding products and other engineering design, research and development, accessories, software and relevant technical services, including in the event that the Group's production is constrained by design techniques and time after receiving an order, the CSSC Group will provide such service in order to keep up with production plan, the Group and the CSSC Group will form a unit for development of new products and technology and the provision of subcontracting management, equipment production, design, exploration and audit consultancy services for related utility projects;

Financial Services to be provided by the CSSC Group to the Group:

1. (i) maintaining Deposits with CSSC Finance;
2. 1. providing Loans Granted by CSSC Finance and the CSSC Group;
   2. providing other financial or credit services which primarily includes the advance(s) provided to the Group from CSSC Finance directly, or payment(s) of compensation(s) and/or provision of indemnity(ies) in respect of any payment obligations which may arise out of the relevant business activities carried on by the Group such as loans, trade finance, bill financing, finance leases, overdrafts, trade advances, promissory notes, letters of credit, guarantees, standby letters of credit, letters of credit confirmation, guarantees in bonds issuance, loan guarantees, asset sales with legal recourses, unutilised irrevocable loan commitments, etc;
   3. entering into FX Forward Contract(s) by CSSC Finance with the Group, CSSC Finance and the Group would agree on the type of currency, amount, currency rate and the expected completion date for the future settlement of a transaction or completion of sale by the Group; and
   4. providing entrusted assets management service to manage the entrusted assets through tailor-madevalue-adding asset management plan and strategy.
3. guarantee services, which refers to the events that the Group receives orders or borrowing funds from banks and the Group is required to have a guarantor, the CSSC Group may provide guarantee service in these events.

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LETTER FROM THE BOARD

• pricing of equipment for ship shall be on terms no less favourable to the Group than terms available from Independent Third Party suppliers taking into account circumstances such as the supply lead-in time, qualification of suppliers and quality of services etc. in the event that there are two or more suppliers from the CSSC Group; in the event that there is only one supplier from the CSSC Group due to technical specification or supply terms restrictions, pricing shall be determined by the parties at arm's length based on the most recent purchase price of the equipment in question by the Group, taking into account of the fluctuation of the price of raw materials, and in any event shall not be less favourable than terms available from Independent Third Party supplier to the Group; and
• pricing of logistics service shall be on terms no less favourable to the Group than terms available from Independent Third Party service providers.

In respect of (e) above, rental of the lease shall be based on market price or the management fee in addition to 10% of the cost; The basis for determining the annual caps for the provision of certain production areas and staff quarters leasing services by the CSSC Group to the Group is on the total value of right-of-use assets recognised by the Group; pricing of Comprehensive Services shall be on terms no less favourable to the Group than terms available from Independent Third Parties; pricing of labour supply services will be based on market price; pricing for providing the shipbuilding products and other engineering design and relevant technical services shall be based on market price.

In respect of (f) above:

• interests of the Deposits shall be on such interest rate on deposits published by PBOC;
• interests of the Loans Granted by CSSC Group shall be at an interest rate not higher than interest rate on loans published by PBOC or at an interest rate which will not be less favourable than that provided by Independent Third Parties providing similar services in the PRC;
• pricing of fees charged for financial and credit services shall be based on the charge standard as published by PBOC or on terms no less favourable to the Group than terms available from Independent Third Parties providing similar services in the PRC;

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LETTER FROM THE BOARD

1. Historical Amounts and Proposed Annual Caps

Historical Amounts

The table below sets out the amount of each category of the Continuing Connected Transactions for the three years ended 31 December 2017, 2018 and 2019 and the comparison with the respective annual cap approved by the independent Shareholders under the 2017-2019 Framework Agreement. The Directors has closely monitored the transaction amounts of each category of the Continuing Connected Transactions for the three years ended 31 December 2019 to ensure the amounts has not exceeded their respective annual caps under the 2017-2019 Framework Agreement. Each of the audited transaction amounts of each category of the Continuing Connected Transactions for the two years ended 31 December 2018 and the unaudited transaction amounts of each category of the Continuing Connected Transactions for the year ended 31 December 2019 has not exceeded their respective annual caps.

Products and services provided by the Group to CSSC Group:

1. Shipping products, electrical and mechanical

Products and services provided by the CSSC Group to the Group:

1. Equipment for ship, electrical and mechanical engineering equipment and metallic materials, shipbuilding

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LETTER FROM THE BOARD

Financial services provided by the CSSC Group to the Group:

1. (i) (1) Maximum daily balance on the

Deposits (Note 2) 7,800.00 7,800.00 7,800.00 5,869.95 5,869.95 7,539.13

1. Aggregate interest on Deposits for

1. Aggregate interest on Loans Granted by

1. (1) Maximum value of the entrusted assets management

1. Aggregate interest on entrusted assets

Agency services provided by the CSSC Group to the Group:

Notes:

1. The historical figures for the year ended 31 December 2019 were unaudited figures.
2. The outstanding balance on the Deposits as at 31 December 2017, 31 December 2018 and 31 December 2019 were approximately RMB5,869.95 million, RMB3,887.01 million, RMB7,539.13 million, respectively.
3. The total amount of FX Forward Contracts as at 31 December 2017, 31 December 2018 and 31 December 2019 were approximately RMB284.89 million, RMB1,715.80 million and RMB3,571.13 million, respectively.

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LETTER FROM THE BOARD

4. The value of the entrusted assets management as at 31 December 2017, 31 December 2018 and 31 December 2019 were approximately RMB1,001 million, RMB400 million and nil, respectively.

As disclosed in the announcement of the Company dated 30 August 2016 and the circular of the Company dated 30 September 2016:

• Maximum daily balance on the Loans Granted by CSSC Group shall not exceed RMB9,600 million, RMB10,100 million and RMB10,600 million for the three years ended 31 December 2017, 2018 and 2019 respectively.

• Maximum amount for financial and credit services in aggregate shall not exceed RMB8,000 million, RMB8,500 million and RMB9,000 million for the three years ended 31 December 2017, 2018 and 2019, respectively.

• Maximum guaranteed amount shall not exceed RMB7,000 million, RMB7,500 million and RMB8,000 million for the three years ended 31 December 2017, 2018 and 2019, respectively.

Proposed Annual Caps

The table below sets out the Proposed Annual Caps for each category of the Continuing Connected Transactions for the three years ending 31 December 2020, 2021 and 2022, respectively:

1. Production areas and staff quarters leasing service, labour supply, environmental business such as land restoration, design

Products and services provided by the CSSC

Group to the Group:

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LETTER FROM THE BOARD

Notes:

1. The proposed annual cap for the disposal of fixed assets is nil, RMB150 million and nil for the three years ending 31 December 2020, 2021 and 2022 respectively.
2. The proposed annual cap for the acquisition of fixed assets by the CSSC Group is RMB134 million, RMB88 million and RMB90 million for the three years ending 31 December 2020, 2021 and 2022 respectively.
3. Maximum daily balance on the Loans Granted by CSSC Group shall not exceed RMB5,029 million, RMB1,873 million and RMB1,800 million for the three years ending 31 December 2020, 2021 and 2022, respectively.
4. Maximum amount for the financial and credit services in aggregate shall not exceed RMB6,570 million, RMB3,350 million and RMB3,350 million for the three years ending 31 December 2020, 2021 and 2022, respectively.
5. No guarantee fee will be charged for the provision of the guarantee service by the CSSC Group to the Group. Maximum guaranteed amount shall not exceed RMB1,600 million, RMB1,600 million and RMB1,600 million for the three years ending 31 December 2020, 2021 and 2022, respectively.

The Proposed Annual Caps are determined taking into account primarily the historical transaction amounts, the Disposal of GSI, production orders in hand, expected orders, material costs and anticipated total production value of the Group.

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LETTER FROM THE BOARD

In arriving at the Proposed Annual Caps, the Directors have also taken into consideration the following factors:

Products and services to be provided by the Group to the CSSC Group

1. Shipping products, electrical and mechanical engineering equipment, metallic materials and sale of waste materials, etc.

The operational orders received by Huangpu Wenchong was increased significantly by approximately 90.5% from approximately RMB6,229 million for the year ended 31 December 2017 to approximately RMB11,865 million for the year ended 31 December 2018. For the year ended 31 December 2019, the operational orders received by Huangpu Wenchong was approximately RMB18,431 million, which had increased significantly for 55.3% from the annual operational orders for the year ended 31 December 2018. The Directors expected that the operational orders received by Huangpu Wenchong as at 31 December 2020 will be approximately RMB13,922 million ("Expected Operational Order").

The operational order of the Company is mainly relating to shipbuilding. Since the shipbuilding production process from preparation for shipbuilding to delivery of ships normally takes more than two years. Hence, the increase in the operational orders received by Huangpu Wenchong for the year ended 31 December 2018 as compared to the year ended 31 December 2017 will inevitably lead to an increase in revenue of the Group for the year ending 31 December 2020 as compared to the year ended 31 December 2019. The annual operational orders received by Huangpu Wenchong for the year ended 31 December 2019 had increased as compared to the year ended 31 December 2018, the Directors expected that the revenue of the Group for the year ending 31 December 2021 will also increase from the year ending 31 December 2020.

Pursuant to the operational orders received by Huangpu Wenchong for the year ended 31 December 2018 and the year ended 31 December 2019, Huangpu Wenchong would strive to achieve its projected operational orders in 2020. Hence, the revenue of the Group is expected to increase in the next two years. In addition, the Directors expected that the revenue from the electrical and mechanical engineering equipment, metallic materials and sale of waste materials, etc. for the year ending 31 December 2020, 2021 and 2022 from the projected increase in the operation orders received by Huangpu Wenchong would be approximately RMB150 million, RMB174 million and RMB202 million respectively.

The Proposed Annual Caps were mainly based on the Expected Operational Order, the estimation of the scale of production of the Group and the production needs of the CSSC Group.

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LETTER FROM THE BOARD

1. Utilities

The unit price for the provision of utilities is determined with reference to the costs of utilities supplied to the CSSC Group, with reference to the unit price of utilities which the Group purchased from third parties, plus a 20-25% management fee or on terms no less favourable to the Group than terms available from Independent Third Parties.

The historical amount of the utilities between the Group and the CSSC Group for the three years ended 31 December 2017, 2018 and 2019 mainly consisted of the amount of transactions between GSI and the CSSC Group. As the current continuing connected transactions between GSI and the CSSC Group will cease to become connected transactions of the Company after the Disposal of GSI and the Disposal of GSI is expected to be completed in the year ending 31 December 2020, the Proposed Annual Cap for the year ending 2020 decreases significantly and decreases further for the year ending 31 December 2021 and 2022.

1. Production areas and staff quarters leasing service, labour supply, design and technical services

The Proposed Annual Caps were determined mainly based on (i) the successful bids by the Group and the CSSC Group that involves the leasing of the production areas and staff quarters and provision of labour supply, design and technical services by the Group to the CSSC Group, and (ii) the existing transactions between the Company or Huangpu Wenchong and GSI will become connected transactions of the Company.

The Group plans to develop the non-shipbuilding business, which includes technical services, of Huangpu Wenchong so as to increase its revenue in 2025.

In 2018, CS Internet, a wholly-owned subsidiary of Huangpu Wenchong, was established and was principally engaged in the provision of internet and related services. As at the Latest Practicable Date, CS Internet and the CSSC Group has succeeded in bids in relation to the provision of internet services for a total contract sum of approximately RMB235 million. The Group will be providing labour supply, design and technical services to the CSSC Group commencing in the year of 2020. The Directors expected that, with the business development of CS Internet, the revenue of the Group from the provision of technical services will continue to increase in the next three years.

As at the Latest Practicable Date, there are on-going transactions in relation to the provision of production areas and staff quarters leasing service, labour supply, design and technical services by the Company and Huangpu Wenchong, a subsidiary of the Company, to GSI. As disclosed in the circular of the Company dated 4 October 2019, GSI will become a 51% non-wholly owned subsidiary of CSSC Holdings, which will be 47.11%-owned by CSSC immediately upon completion of the Disposal of GSI and the issuance of the Consideration Shares, hence GSI will become a connected person of the Company thereafter. The existing transactions between the Company or Huangpu Wenchong with GSI will then become a connected transactions. The Proposed Annual Caps for the years ending 31 December 2020, 2021 and 2022 were determined based on the existing transactions between the Company or Huangpu Wenchong with GSI which will become continuing connected transactions subsequent to the Disposal of GSI.

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Products and services to be provided by the CSSC Group to the Group

1. Equipment for ship, electrical and mechanical engineering equipment and metallic materials, shipbuilding accessories, etc.

The Proposed Annual Caps were mainly determined based on the shipbuilding orders received by the Group and the production schedule of the Group.

According to the shipbuilding production process, the Group will be required to incur substantial costs for procuring equipment to be used on the ship, electrical and mechanical engineering equipment and metallic materials and other shipbuilding accessories approximately two years after receiving the shipbuilding orders based on past experience. The operational orders, which also includes shipbuilding orders, of Huangpu Wenchong for the year ended 31 December 2018 had increased significantly from the year ended 31 December 2017 and the operational orders of Huangpu Wenchong for the year ended 31 December 2019 had increased from the year ended 31 December 2018. Taking into the account of such significant increase, the Proposed Annual Cap for the year ending 31 December 2020 (i.e. the procurement during the two years after receiving the shipbuilding orders for the years ended 31 December 2018 and 2019) will also increase accordingly to accommodate the anticipated increase in procurement costs for the shipbuilding orders received in the year ended 31 December 2018. In addition, taking into account the reorganisation of CSSC and CSIC has been implemented in October 2019 and the continuing connected transactions between CSIC (and its subsidiaries) and the Group will become the continuing connected transactions of the Company thus the size of the relevant continuing connected transaction will increase.

Similarly, the Proposed Annual Cap for the year ending 31 December 2021 was also determined based on the total shipbuilding orders to be received by the Group for the year ended 31 December 2019 and the estimated total shipbuilding orders to be received by the Group for the year ending 31 December 2020.

The Proposed Annual Cap for the year ending 31 December 2022 represents an annual increase of approximately 15% from the year ending 31 December 2021 based on the estimation of increase in shipbuilding orders in the year ending 31 December 2020 the expectation of the continuing recovery of the shipping market in 2021, which will be no worse than the shipping market in 2019, by the Directors.

1. Leasing of production areas, labour supply, design and technical services, and Comprehensive Services

Similar to the provision of equipment for ship, electrical and mechanical engineering equipment and metallic materials, shipbuilding accessories, etc. by the CSSC Group to the Group, the Proposed Annual Caps for leasing of production areas, provision of labour supply, design and technical services and Comprehensive Services by the CSSC Group to the Group has taken into account of the (i) operational orders received by Huangpu Wenchong, (ii) the estimated total shipbuilding orders to be received by the Group, and (iii) the possible continuing connected transactions between the CSIC and its subsidiaries and the Group after the strategic restructuring.

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LETTER FROM THE BOARD

As at the Latest Practicable Date, there were on-going transactions in relation to the leasing of production areas, provision of labour supply, design and technical services, and Comprehensive Services by GSI to the Company and Huangpu Wenchong. As disclosed in the circular of the Company dated 4 October 2019, GSI will become a 51% non-wholly owned subsidiary of CSSC Holdings, which will be 47.11%-owned by CSSC immediately upon completion of the Disposal of GSI and the issuance of the Consideration Shares, hence GSI will become a connected person of the Company. The existing transactions between the Company or Huangpu Wenchong with GSI will then become connected transactions. The Proposed Annual Caps for the years ending 31 December 2020, 2021 and 2022 have taken into account the existing transactions between the Company or Huangpu Wenchong with GSI which will become continuing connected transaction subsequent to the Disposal of GSI.

The production areas, labour supply, design and technical services to be provided by the Company and Huangpu Wenchong to GSI consists mainly of the leasing of production area in Zhongshan while the production areas, labour supply, design and technical services to be provided by GSI to the Company and Huangpu Wenchong consists mainly of hotel accommodation service, computer software maintenance service, tugboat service, service for processing pipes on ships and repairing service for ship equipment. There is no mutual provision of similar services between them.

The basis for determining the annual caps for the provision of certain production areas and staff quarters leasing services by the CSSC Group to the Group is on the total value of right-of-use assets recognised by the Group.

Financial services to be provided by the CSSC Group to the Group

1. (i) Maintaining Deposits with CSSC Finance

The Directors have considered the interest rates for deposits to be provided by certain commercial banks and financial institutions and determined that the interest rate provided by CSSC Finance is more favourable to the Group.

The Proposed Annual Caps for the years ending 31 December 2020, 2021 and 2022 were mainly determined based on annual average monetary capital of the Group in the amount of approximately RMB8,000 million to RMB9,000 million.

Taking into account that the Disposal of GSI, it will cease to be a subsidiary of the Group and the on-going Deposits between GSI and the CSSC Group will also cease to be continuing connected transaction, the Proposed Annual Caps for the years of 2021 and 2022, transaction was decreased for approximately 30% from that of the year of 2020.

(ii) FX Forward Contracts to be entered into with CSSC Finance

The Company is subject to high exchange rate risk as the Group's ship export orders are denominated in US dollars, where some of the domestic ships orders are denominated in USD but payable in RMB. The operation of the forward foreign exchange contracts is closely related to the number of ship contracts entered or to be entered into by the Group, as well as the anticipated changes of the exchange rate(s)/interest rate(s) in the markets. The annual cap of the FX Forward Contract for the three years ending 31 December 2022

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is based on (i) there is a delay in the shipbuilding production process in 2017 and 2018 and hence a delay in payment for the respective shipbuilding orders, and (ii) the estimation of the total amount of contract sums that would be exposed to foreign exchange risk during the projected period.

(iii) Entrusted assets management services to be provided by CSSC Finance

The proposed maximum value of the entrusted asset management for the years ending 31 December 2020, 2021 and 2022 are RMB2,000 million, RMB1,000 million and RMB1,000 million, respectively. The Group seeks to obtain higher returns by investing the Group's surplus funds. When the Group has temporary surplus funds, it may choose to place such funds at fixed deposit or low-risk entrusted assets management services. When the expected rate of return of entrusted assets management service is higher than the conventional interest rate of fixed bank deposits, the Group may engage assets management services as and when appropriate in order to maximise the returns to shareholders. As at the Latest Practicable Date, the benchmark 1-year interest rate of bank deposits plus a 50% upward adjustment is 2.25%, while the expected yield from entrusted asset management usually ranges from approximately 3% for the same term.

Agency Services to be provided by the CSSC Group to the Group

1. (i) Sales agency fees

The payment of the sales agency fees is made to the CSSC Group in proportion to the progress payment of the vessel in question. In determining the Proposed Annual Caps for the years ending 31 December 2020, 2021 and 2022, the Directors have taken into account the shipbuilding orders received by the Group, the production schedule of the Group and the shipbuilding capacity of the Group for the respective period.

(ii) Procurement agency fees

According to the confidentiality requirements of the relevant authority for specific ships, certain equipment for use on specific ships must be imported through state-owned enterprises with the relevant certifications and qualifications required by the relevant authority. As such, the Group has been purchasing required imported equipment through the CSSC Group which possessed such qualifications. When determining the Proposed Annual Caps for the years ending 31 December 2020, 2021 and 2022, the Directors have taken into account the orders of specific ships received by the Group, the production schedule of the Group and the shipbuilding capacity of the Group for the respective period.

Additional information in relation to the Pricing Policy

In relation to (a) provision of shipping products, electrical and mechanical engineering equipment, metallic materials and sale of waste materials etc. by the Group to CSSC Group, pricing will be based on market price which is taking into account of the data of the China Association of the National Shipbuilding Industry* (中國船舶行業協會) and after arm's length negotiation.

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Due to the limitations on the technical specifications for certain equipment or specific requirements for the supply of certain products, such as a specific supplier as stipulated by the shipowner, there are situations that the Company could only obtain one quotation. Upon such situation, the Company will consider the recent purchase price of such products and the market fluctuation of the costs of the materials and the price will be determined after arm's length negotiation.

Payment terms

The general payment terms for each Continuing Connected Transactions are as follows:

In respect of (a) above, the payment terms are in accordance with the terms of the relevant agreements, the general payment terms are that interim payment will be made for different stages of production or issue of invoice from time to time;

In respect of (b) above, the payment terms are in accordance with the terms of the relevant agreements, the general payment terms are that payment will be made per month or per quarter, taking into account of the quantity of utilities consumed by the Group;

In respect of (c) above, the payment terms are in accordance with the terms of the relevant agreements, the general payment terms are that payment will be made by the Group after the obligations of the Group under the contract are fulfilled or payment will be made by the Group prior to the obligations of the Group under the contract are commenced, and by way of cheque. For long-term contracts, the general payment terms are that payment by the Group will be made in a specific intervals (such as once per month or per quarter, etc.), taking into account of the amount of services consumed by the Group, and payment will be made after the issuance of the invoice.

In respect of (d) above, the payment terms are in accordance with the terms of the relevant agreements. For the provision of equipment of ships and electrical and mechanical engineering equipment, the general payment terms are that the Group will make a deposit within a specific time after entering into the relevant agreements and the subsequent payment will be made in accordance with the invoices received by the Group from time to time that were issued by the CSSC Group pursuant to the production progress, time of delivery, terms of guarantee, etc. For the accessories and resources, the general payment terms are that the Group will make the payment after the invoices were issued subsequent to the accessories and resources having arrived at the storage of the Group and being inspected.

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LETTER FROM THE BOARD

In respect of (e) above, the payment terms are in accordance with the terms of the relevant agreements. For the leasing service, the general payment terms are that the invoice will be issued after the entering into the lease agreement and the rental payment will be made in specific time intervals (such as monthly, quarterly or yearly). For labour supply and technical services, the general payment terms are that invoice will be issued after the obligations under the relevant agreements are fulfilled. For long-term labour supply agreement, the general payment terms are that the payment will be made after the end of a specific time interval (such as every month or every quarter) and with reference to the amount of labour supply provided, and payment will be made after the issuance of the invoice.

In respect of (f) above, for Deposits, the general payment terms for the interests of the Deposits are to be paid on the due date. For the Loans Granted by CSSC Group, the payment terms are in accordance with the terms of the relevant agreements and the general payment terms of the interest of the loan will be paid by the end of each quarter and on the maturity date, the loan will be repaid together with the last interim of the interest of the respective Loans Granted by CSSC Group. For the FX Forward Contracts, the payment terms are in accordance with the terms of the relevant agreements and the general payment terms are the payment to be made on the foreign exchange delivery date and in the respective foreign currency.

In respect of (g) above, the payment terms are in accordance with the terms of the relevant agreements. The Group does not need to pay management fee.

In respect of (h) above, the payment terms are in accordance with the terms of the relevant agreements. For the sales agency services, the general payment terms are pursuant to the agreed percentage of the sales as agency service fee in the relevant agreements and payable in accordance with the progress. For the procurement agency services, the general payment terms are pursuant to the agreed percentage of the procurement as agency service fee in the relevant agreements.

The Board is of the view that the payment terms are fair and reasonable, on normal commercial terms or better and in the interests of the Company and its shareholders as a whole as the Continuing Connected Transactions are in the ordinary course of business of the Group and based on normal commercial terms.

1. Reasons for Entering into the 2020-2022 Framework Agreement

The Continuing Connected Transactions allow the Group to leverage on the reputation and bargaining power of the CSSC Group in the international shipbuilding industry, provide a reliable and cost effective source of materials, labour, design, technology, financial and credit services and other services necessary for the Group to conduct its business, and allow flexibility for better allocation of resources between each other so as to meet the anticipated production schedules for shipbuilding in the next few years.

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In addition, the Directors have taken into consideration the following regarding each of the Continuing Connected Transactions contemplated under the 2020-2022 Framework Agreement:

1. The CSSC Group has the need to purchase shipping products and complete sets or accessories of equipment while the Group has the capability of designing and manufacturing such products and could provide such products to the CSSC Group; or when the CSSC Group is facing a shortage in equipment, materials or accessories caused by insufficient procurements, or delay in delivery of goods by suppliers, or when the CSSC Group is urgently required to meet orders from its customers which temporarily exceeded its production capacity in the production of CSSC Group, the Group may provide various equipment, materials and accessories to the CSSC Group to meet its routine and urgent production needs, on terms to be determined based on market comparable prices. In addition, the Group could handle waste through the logistic company of the CSSC Group and sell fixed assets to the CSSC Group that are no longer applicable to the Group.
   The products and services to be provided from the Group to CSSC Group are different from that to be provided from the CSSC Group to the Group. The products and services to be provided from the Group to CSSC Group mainly consists of the sale of ships, electrical and mechanical engineering equipment (mainly pumps and cranes), sale of waste materials, technical services for special scientific research project and research and development, while the products and services to be provided from the CSSC Group to the Group are mainly for the raw materials and equipment for shipbuilding, technical services for the entire ship and Comprehensive Services. The CSSC Group has to produce the shipping products and equipment, while the Group has the ability to design and manufacture the products which are required for the production of the CSSC Group. The Board is of the view that there is no mutual provision of similar services.
2. In the course of its operations and provision of services, the Group shall provide utilities facilities of wind, water, electricity and gas to the CSSC Group. The fees for provision of utilities (primarily supply of wind, water and electrical power and gas) by the Group to the CSSC Group is based on the utilities' costs of the Group supplied to the CSSC Group plus a management fee ranging from 20% to 25% above the cost of the relevant type of utilities or in terms no more favourable than those offered to Independent Third Parties.
   Given that the Group is not principally engaged in provision of utilities facilities, the 20% to 25% margin on the fees primarily represents the CSSC Group's share of the expenses involved in overall generation of such utilities facilities. Such margin has been agreed after arm's length negotiation between the Group and the CSSC Group, is considered as fair and reasonable to defray the relevant administrative costs and the miscellaneous expenses (including maintenance costs and depreciation charges) from time to time incurred by the Group for provision of such utilities facilities the Group.

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1. The primary purpose for provision of production areas and staff quarters leasing service by the Group to the CSSC Group is to fully utilize certain properties held by the Group to gain cost efficiency on those properties. The Group will provide to the CSSC Group labour supply services, primarily providing training and supplying short-term labourers, shipbuilding services etc. According to the demands for technicians, the Group may provide to CSSC Group services for staff training and appraisals and technical services relating to business of the Group and short-term labour supply when the CSSC Group is in short of labor force for shipbuilding services. Besides, the Group will provide technical services such as installation, usage and maintenance services and design, research and development, self- developed software and related technical services of shipping products or other engineering in relation to the business of the Group to the CSSC Group from time to time. The Directors are of the view that the provision of such services to the CSSC Group enable the Group to maximize the use of labour and to capitalise on its excess production capacity and existing shipbuilding-related techniques to earn additional revenue for the Group.
2. The Group sources from the CSSC Group shipping equipment, electrical and mechanical engineering equipment, accessories and resources mainly includes complete sets or accessories of resources, accessories, production equipment and tools for ship production, etc.. The Group also uses logistics and related services, etc. provided by the CSSC Group. The Group sources these types of equipment and services from the CSSC Group and also from other independent suppliers so as to meet its routine and urgent needs. Considering that (i) the CSSC Group is centralized in manufacturing some of such equipment, and (ii) the CSSC Group is able to obtain competitive prices on certain materials by making bulk order through its centralized purchase system, the Directors are of the view that the CSSC Group has the capacity to supply various shipbuilding materials or to provide necessary services when the Group has the production needs. Likewise, the Directors are of the view that it is more cost-effective to purchase of materials and equipment through bulk purchase by the CSSC Group.
3. Labour services primarily include the borrowing of labour force from and subcontracting of shipbuilding works or steel structure works to the CSSC Group during the Group's peak production season. Given that the need for labour varies in different stages of production, the Directors consider that procurement of labour services with special skills from the CSSC Group during the Group's peak production season would be beneficial to the Group as it would not be required to maintain a large workforce of its own at all times. As the CSSC Group is specialised in the design of certain types of ship products or equipment, the Group also engages the CSSC Group to provide design and technical services to meet the requirements of different progresses of production. The Group has sourced the Comprehensive Services from the CSSC Group for years on terms no less favourable than terms available from Independent Third Parties, the Directors believe that it would be more cost-efficient for the Group to retain the CSSC Group for the Comprehensive Services.

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Finance. The FX Forward Contracts require no initial cash outlay or purchase cost. The principal terms of the FX Forward Contracts and the transaction process are as follows: the Group will first enquire from Independent Third Party bank and CSSC Finance as to the exchange rate, transaction period and transaction amount regarding specific currency whenever it intends to enter into a FX Forward Contract. If the terms are more favourable than those offered by Independent Third Parties to the Group, the Group will enter into FX Forward Contracts with CSSC Finance. For each FX Forward Contract with CSSC Finance, there will be one transaction between the Group and CSSC Finance. Such transaction will take place on a pre-agreed transaction date.

The number of contracts to be entered with CSSC Finance depends on the hedging needs of the Group. In particular, it depends on the timings of inflow of cash denominated in US dollars from the Group's operations and outflow of cash denominated in RMB for the Group's operating cost. In order to mitigate the currency risk having regard to the timing of operating cash inflows denominated in US dollars and outflows denominated in RMB and to lock up our profit margin, contracts of different size and timing may be needed. The Group will decide the number of contracts to be entered with CSSC Finance according to the schedule of payments from customers or to suppliers and/or subcontractors throughout the year.

The Group will also continue to enter into FX Forward Contracts with Independent Third Party banks if and when appropriate. The Group will compare the terms offered by Independent Third Party banks with the terms offered by CSSC Finance before deciding on whether to enter into FX Forward Contracts with CSSC Finance. In view of this, the Directors consider that the entering into of the FX Forward Contracts with CSSC Finance provide an extra option for the Group to fulfill its operational needs to hedge against risks relating to exchange rates and therefore it is in the interest of the Group and the Shareholders as a whole.

1. The Group has engaged CSSC Finance to provide entrusted assets management services in order to generate incomes from certain unutilised funds. The principal terms of the entrusted assets management service are as follows: the Group will entrust CSSC Finance with certain assets for an agreed period of time. CSSC Finance will invest the entrusted assets with designated types of low risk investment products available in the market in order to maximise the profitability of such entrusted assets. CSSC Finance will issue monthly statement to the Group to report the status of investments during the entrusted term. The Directors are of the view that it is in the interest of the Company and its Shareholders as a whole to continue to leverage on CSSC Finance's expertise to provide entrusted assets management services.

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LETTER FROM THE BOARD

On bases summarized above and given that (i) the Continuing Connected Transactions are entered into under the usual and ordinary course of business of the Group and the CSSC Group; and (ii) the Group will be benefited from better allocation of resources with the CSSC Group and hence enjoy competitive cost advantages, the Directors (excluding the view of the independent non-executive Directors who will provide their view based on the advice to be provided by the Independent Financial Advisor) are of the view that the terms of the 2020-2022 Framework Agreement and each Continuing Connected Transactions contemplated thereunder (including the Proposed Annual Caps) are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

1. Risk Control Relating to the Deposit Under the 2020-2022 Framework Agreement

In view of the significant amount of the Deposits placed or to be placed with CSSC Finance from time to time, CSSC Finance has provided an undertaking for, among other things, ensuring the safety of the Deposits:

1. provide to the Company, at any time, financial services with terms which are no less favourable than for comparable financial services provided to CSSC or members of the CSSC Group; and those of the comparable financial services the Company may obtain from other financial institutions;
2. ensure that the Financial Operation Licence (金融許可證) and other business permits, approvals and filings, etc. have been lawfully obtained by CSSC Finance and will remain valid and effective;
3. ensure the safe operations of its fund settlement and clearance network, assure the safety of funds, control the risk exposure and safety of the Deposits and will satisfy the requirements for the payment of the Deposits;
4. ensure the strict compliance with the risk monitoring indicators for financial institutions promulgated by the CBIRC and that the major regulatory indicators such as gearing ratio, interbank borrowing ratio and liquidity ratio will also comply with the requirements of the CBIRC and other relevant laws and regulations;
5. report its business and financial positions to the Company regularly, co-ordinate with the auditors of the Company in the course of their audit work to enable the Company to fulfil the requirements of the Hong Kong Listing Rules; and
6. on happening of new, or special event that may possibly affect the Company, CSSC Finance shall proactively inform the Company on a timely basis.

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In order to safeguard the interests of the Shareholders, the Group has adopted certain guidelines and principles in monitoring, amongst other things, the Deposits arrangements. These include an assessment of the fund operation and control of risk exposure of CSSC Group and evaluation of its services provided through its reports to be obtained regularly as mentioned above. Given SASAC's requirement of centralization of funds held by state-owned enterprises, the undertakings provided by CSSC Group on risk control on the financial services (including the Deposits) to be provided to the Group and that the Deposits will be subject to annual review conducted by the independent non-executive Directors, the auditors of the Company and strict compliance of risk monitoring by the CBIRC on CSSC Group, the Directors (excluding the view of the independent non-executive Directors who will provide their view based on the advice to be provided by the independent financial adviser of the Company) are of the view that the arrangements for, amongst other things, the Deposits are in the interests of the Company and the Shareholders as a whole.

Additional Measures to safeguard interests of the Company and Independent Shareholders

The Group will, through the Group's internal control procedures (including the Contract Management Rules) and a series of risk management arrangements in accordance with the regulatory requirements, endeavor to maintain its independency in decision-making as well as the fairness of the prices and terms of each Continuing Connected Transaction.

Such arrangements shall include:

1. each Continuing Connected Transaction contemplated under the 2020-2022 Framework Agreement shall be conducted on a non-exclusive basis. The Group has the flexibility to enter into arrangement with third party for purchasing or selling equipment and materials and/or provision of services as it deems fit;
2. the pricing mechanism is transparent and the implementation of such pricing mechanism is subject to strict scrutiny by the Group's contract review committee involving specific functional departments, administrative departments, finance department and legal department, etc. of the Group in accordance with the Contract Management Rules; and
3. apart from the annual review by all independent non-executive Directors and external auditors of the Group to confirm that, among others, the Continuing Connected Transactions are conducted in according with the terms including the pricing principles set out in the relevant framework agreement, the Continuing Connected Transactions are also subject to review by the Supervisory Committee of the Company to ascertain whether such Continuing Connected Transactions are conducted under fair and reasonable terms and accordingly whether the interest of the Company will be affected.

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of shipbuilding industry to cope with the needs arising from its production and operation. Upon the expansion in scale of the Company, the production volume will be increased, and the needs for capital requirements for the production will also be increased correspondingly. In order to lower the capital costs and ensure the safe and effective utilization of the funds, the Company, upon considering previous deposit transactions and the practical need required for future development, believes it is practically necessary to maintain Deposits with CSSC Finance, aiming to meet the capital requirements for its production and operation. The deposit interest rate offered by CSSC Finance will be based on the deposit interest rate promulgated by PBOC from time to time. The Deposits are funds of the Group and there will be no change in the consolidated assets of the Group as a result of placing the Deposits with CSSC Finance pursuant to the terms of the 2020-2022 Framework Agreement. The Group can earn interests out of the deposit transactions. As such, the Directors do not expect that the deposit transactions would have any adverse financial impact on the earnings, assets and liabilities of the Group.

Due to the sizeable amount of Deposits placed or to be placed with CSSC Finance from time to time, CSSC Finance has provided (including but not limited to) an undertaking as to the safety of the Deposits, ensuring the Deposits placed or to the placed by the Company is safe without any risk exposure. Deposits will be reviewed annually by the Independent non-executive Directors and auditors of the Company and in strict compliance with the risk control imposed by the CBIRC on the CSSC Finance. It is expected that CSSC Group will issue one or two tranche(s) of medium and long term bonds annually during 2020 to 2022, and will finance the related companies within CSSC Group in one time. The single maximum loan amount to be obtained by the Company is estimated to be RMB1 billion. The subscription of the bonds, if proceeded, will provide an opportunity to the Company to obtain finance at a relatively low interest rate to improve its cash flow. If a loan is not immediately withdrawn or fully utilized as soon as it is released, then the Company's outstanding deposit balance during that period will increase substantially. Based on CSSC Finance's estimation, its total asset value in the next three years will be in the region of RMB52 billion and the maximum deposit balance of RMB8 billion represents only approximately 15% of CSSC Finance's then total asset value. Thus, it will not constitute substantial liabilities. Based on the maximum amount of RMB8 billion, it represents approximately 17% of the deposit balance of RMB46.2 billion maintained with CSSC Finance as at July 2019. Therefore, the deposit interest income will not have any significant effect on CSSC Finance's profit. The Company therefore believes that the Deposit arrangements provided by CSSC Finance are in the interest of the Company and Shareholders as a whole.

(ii) Financial effects of FX Forward Contracts

The Company's ship export orders are denominated in US dollars and some domestic ship orders are also denominated in RMB with reference to US dollars. The recognised assets and liabilities in US dollars and the unrecognised ship settlement in US dollars lead to foreign currency risk, which may affect the results of operation of the

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Group. The FX Forward Contracts thus hedge the Company's currency risk. The net effect on earnings is the difference between the foreign exchange gain or loss on the asset or liability and the change in the fair value of the FX Forward Contracts.

1. Information About the Parties

Information about the Company

The Company is a core subsidiary and platform of CSSC (a large-scalestate-owned enterprise) in Southern China. As at the Latest Practicable Date, the Company has two major non-wholly owned subsidiaries, namely GSI and CSSC Huangpu Wenchong Shipbuilding Company Limited and their principal activities cover four major segments including defense equipment, shipbuilding, offshore engineering and non-ship business, with principal products of shipbuilding and marine products including military ships, special supporting ships, public services ships, oil tankers, feeder container ships, ro-ro passenger ships, semi-submerged ships and polar module carriers, offshore platform, as well as non-ship products including steel structures and sets of electromechanical equipment.

Information about CSSC

CSSC is a State-authorized investment institution directly supervised and administered by SASAC whose core business includes shipbuilding, ship-repairing, processing, export/import of marine equipment, diversified businesses such as other steel structure manufacturing and international cooperation, joint venture operations, financing, technology trading and workforce exportation.

As at the Latest Practicable Date, CSSC, the controlling shareholder of the Company, held 847,685,990 Shares of the Company directly or indirectly, representing 59.97% of the issued Shares of the Company.

Information about CSSC Finance

CSSC Finance is a wholly-owned subsidiary of CSSC. The principal business of CSSC Finance includes deposit-taking, loans handling, acceptance and discounting of bills, inter- bank borrowing businesses and provision of other financial services.

Under the Hong Kong Listing Rules, CSSC is a connected person of the Company while the transactions between the Group and any of the CSSC Group (including CSSC Finance) constitute connected transactions of the Company, subject to the compliance with the relevant disclosures and/or Independent Shareholders' approval requirements of the Hong Kong Listing Rules.

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3. LISTING RULES IMPLICATION

Continuing Connected Transactions

The provision of Financial Services by CSSC Group provided by CSSC Group to the Group under the 2020-2022 Framework Agreement constitutes financial assistance received by the Group from a connected person. As (i) the provision of Financial Services by CSSC Group is to be provided to the Group on normal commercial terms that are comparable to or more favourable than those offered by Independent Third Parties for similar services in the PRC, and

1. no security over the assets of the Group is granted in respect of the Financial Services, the Financial Services by CSSC Group to be provided by CSSC Group to the Group under the 2020-2022 Framework Agreement are exempt from reporting, announcement and Independent Shareholders' approval requirements under Rule 14A.90 of the Hong Kong Listing Rules.

As the applicable percentage ratios calculated pursuant to Rule 14.07 of the Hong Kong Listing Rules for the Proposed Annual Caps of the continuing connected transaction (save for the provision of the Financial Services by the CSSC Group) under the 2020-2022 Framework Agreement are higher than 5% on an annual basis, the transactions relating to the Continuing Connected Transactions (save for the provisions of the Financial Services by the CSSC Group) contemplated under the 2020-2022 Framework Agreement constitute non-exempt continuing connected transactions of the Company that are subject to reporting, announcement and Independent Shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules.

As the applicable percentage ratios for the Proposed Annual Cap of the maximum value of the entrusted assets management under the 2020-2022 Framework Agreement exceeds 5% but less than 25% calculated pursuant to Rule 14.07 of the Hong Kong Listing Rules, the Proposed Annual Caps in relation to the maximum value of the entrusted assets management under the 2020-2022 Framework Agreement constitute a non-exempt continuing connected transaction and also a discloseable transaction of the Company and are subject to reporting, announcement and Independent Shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules and subject to the relevant discloseable transaction requirements under Chapter 14 of the Hong Kong Listing Rules.

As the applicable percentage ratios in relation to each of the aggregate of maximum daily balance on the Deposits and maximum daily balance on the FX Contracts under the 2020-2022 Framework Agreement exceed 25% but less than 75% calculated pursuant to Rule 14.07 of the Hong Kong Listing Rules, the Proposed Annual Caps in relation to each of aggregate of maximum daily balance on the Deposits and maximum daily balance on the FX Contracts under the 2020-2022 Framework Agreement constitute a non-exempt continuing connected transaction and also a major transaction of the Company and are subject to reporting, announcement and Independent Shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules and subject to the relevant major transaction requirements under Chapter 14 of the Hong Kong Listing Rules.

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The Company will comply with all relevant reporting and independent non-executive Directors' review requirements under Chapter 14A of the Hong Kong Listing Rules in respect of the Continuing Connected Transactions (save for the provision of the Financial Services by the CSSC Group).

CSSC and its associates (together holding 847,685,990 Shares of the Company, representing 59.97% of the issued Shares of the Company, as at the Latest Practicable Date) will abstain from voting in respect of the resolution to the terms and Proposed Annual Caps of each of the Continuing Connected Transactions (save for the Financial Services by the CSSC Group) contemplated under the 2020-2022 Framework Agreement at the forthcoming EGM.

Since each of Mr. Han Guangde, Mr. Chen Zhongqian, Mr. Chen Liping, Mr. Sheng Jigang, Mr. Xiang Huiming, Mr. Chen Ji and Mr. Shi Jun holds managerial positions at CSSC Group and/or its associates, in accordance with the Company's internal control policy on connected transactions, they had abstained from voting on relevant Board resolutions to approve (among others) the entering into the 2020-2022 Framework Agreement, the terms and Proposed Annual Caps of each of the Continuing Connected Transactions (save for the Financial Services by the CSSC Group) contemplated under the 2020-2022 Framework Agreement.

Save for the above, to the best of the Director's knowledge, information and belief, having made all reasonable enquiries, (i) no Shareholder has any material interest in the resolution to be proposed at the EGM and will abstain from voting at the EGM, and (ii) none of the Directors has a material interest in the transactions in relation to the terms and Proposed Annual Caps of each of the Continuing Connected Transactions (save for the Financial Services by the CSSC Group) contemplated under the 2020-2022 Framework Agreement and have to abstain from voting on the Board resolution.

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LETTER FROM THE BOARD

The actual transaction amount for the continuing connected transaction between the Group and the CSSC Group since 1 January 2020 up to 15 January 2020 and the estimated maximum transaction amount since 1 January 2020 up to the date of the EGM of 26 February

2020 of each category of the Continuing Connected Transactions are as follows:

1. Production areas and staff quarters leasing service, labour supply, design

Products and services provided by the

CSSC Group to the Group:

1. Equipment for ship, electrical and mechanical engineering equipment and metallic materials, shipbuilding

Notes:

1. The actual transaction amount since 1 January 2020 up to 15 January 2020 were unaudited figures.
2. The outstanding balance on the Deposits as at 15 January 2020 was approximately RMB5,107.50 million.
3. There is no new FX Forward Contracts entered into during the period from 1 January 2020 up to the Latest Practicable Date and the Company shall ensure that no new FX Forward Contracts will be entered into during the period up to the date of EGM. The total amount of FX Forward Contracts as at 15 January 2020 is RMB3,521.40 million and the expected maximum total amount of FX Forward Contracts as at the date of the EGM is RMB3,580.00 million. The relevant contracts with respect to such outstanding balance on the FX Forward Contracts were entered into during the period from year 2017 to 2019 and pursuant to the 2017-2019 Framework Agreement that was approved by the Independent Shareholders on 18 October 2016.

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LETTER FROM THE BOARD

As at the Latest Practicable Date, the Company has maintained the Deposits provided by CSSC Finance as at 31 December 2019 and the maximum amount of the daily balance on the Deposits from 1 January 2020 up to the date of the EGM exceeds 5% of the applicable percentage ratios pursuant to Rule 14.07 of the Hong Kong Listing Rules. The relevant transactions were entered into during the period from year 2017 to 2019 and pursuant to the 2017-2019 Framework Agreement that was approved by the Independent Shareholders on 18 October 2016. The Company has taken into account of the specific nature of (f)(i) Deposits that if such Deposits are withdrawn prior to the maturity date, the Group will suffer from an interest loss from the fixed-term Deposits. In relation to the other continuing connected transactions above, the Company may have to pay a compensation in early termination of the relevant contracts prior to the term of the respective contracts. This will also cause damage to the reputation of the Group. Hence, it will be detrimental to and will not be in the interest of the Company and its Shareholders as a whole to discontinue these continuing connected transactions.

The Company has breached Rules 14A.36 and 14A.54(2) for conducting the continuing connected transactions (other than the transactions of (f)(ii), (f)(iii), (f)(iv), (f)(v) and (g)) contemplated under the 2020-2022 Framework Agreement with the CSSC Group before such agreement has come into effect after obtaining independent shareholders' approval at the EGM.

The incidents are unintentional. The Company has first negotiated with the CSSC Group and entered into the Previous 2020-2022 Framework Agreement on 18 November 2019 in relation to, among others, the renewal of the Continuing Connected Transactions as disclosed in the announcement of the Company dated 18 November 2019. The Board originally planned to submit the resolution in respect of the Previous 2020-2022 Framework Agreement for voting at the second extraordinary general meeting of 2019 of the Company. Since additional time is required to further finalise the relevant figures and information in the Previous 2020-2022 Framework Agreement, the Board, after careful consideration decided to cancel the resolution in respect of the Previous 2020-2022 Framework Agreement as disclosed in the announcement of the Company dated 9 December 2019.

The Company has already at its reasonable endeavours taken the following remedial measures in relation to the incidents:

1. the Company has negotiated with the CSSC Group and entered into the 2020-2022 Framework Agreement with the CSSC Group on 30 December 2019 prior to the expiry of the 2017-2019 Framework Agreement on 31 December 2019 the Company;
2. the Company has made an announcement in relation to, among others, the entering into and the implementation of the 2020-2022 Framework Agreement and the Continuing Connected Transactions (together with the Proposed Annual Caps) contemplated thereunder on 30 December 2019; and

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3. the Board has implemented enhanced internal control to monitor the relevant transactions during the period since 1 January 2020 up to the date of the EGM closely including but not limited to issuing internal guidelines to relevant entities of the Group to ensure the transactions.

The Company will take the following measures to prevent similar incidents in the future:

1. the Company will commence the preparation and negotiation with the CSSC Group for the renewal of the Continuing Connected Transactions (if required) well in advance in about four months prior to its expiry such that there will be sufficient time for serving sufficient notice for the extraordinary general meeting and to compile the information and preparing the circular if such Continuing Connected Transactions require the approval from the Independent Shareholders upon its renewal; and
2. the Company will closely monitor the Continuing Connected Transactions and will be in close contact with the CSSC Group and collect the information in relation to the Continuing Connected Transactions in a timely manner to ensure the accuracy of the transaction amounts.

4. EGM

The EGM will be held at the Conference Room, 15/F Shipping Building, 137 Gexin Road,

Haizhu District, Guangzhou, PRC at 10:00 a.m on Wednesday, 26 February 2020.

The notice convening the EGM, the proxy form and the reply slip have been sent to the Shareholders on 30 December 2019.

Any Shareholder who is entitled to attend and vote at the EGM has the right to appoint one or more proxies to do so on behalf of himself. The proxy need not be a Shareholder. In order to ensure validity, a completed proxy form and other authorization documents (if any) must be delivered to the registered office of the Company not less than 24 hours before the time scheduled for the holding of the EGM. Shareholders of H shares must deliver the completed proxy forms and other authorization documents (if any) to the Company's H share Registrar, Hong Kong Registrars Limited at Hopewell Center at Shops 1712-1716, 17/F, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong. A Shareholder who has completed and delivered a proxy form can still attend the EGM and vote in person.

All resolutions to be proposed at the EGM will be voted on by way of poll in accordance with the Hong Kong Listing Rules.

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5. RECOMMENDATIONS

The Board considers that the resolutions to be proposed at the EGM are in the interest of the Company and the Shareholders as a whole. Accordingly, the Board recommend all Shareholders to vote in favor of all resolutions to be proposed at the EGM.

6. FURTHER INFORMATION

Your attention is also drawn to the information set out in the appendices to this circular.

Yours faithfully,

For and on behalf of the Board

CSSC Offshore & Marine Engineering (Group)

Company Limited

Han Guangde

Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

中船海洋與防務裝備股份有限公司

CSSC OFFSHORE & MARINE ENGINEERING (GROUP) COMPANY LIMITED

(a joint stock company with limited liability incorporated in the People's Republic of China)

(H Shares Stock Code: 00317)

5 February 2020

To the Independent Shareholders

Dear Sir or Madam

MAJOR TRANSACTION AND NON-EXEMPT CONTINUING CONNECTED

TRANSACTIONS UNDER THE 2020-2022 FRAMEWORK AGREEMENT

We refer to the circular dated 5 February 2020 (the "Circular") issued by the Company of which this letter forms part. Unless the context otherwise requires, terms and expressions defined in the Circular have the same meanings herein.

We have been appointed by the Board as members of the Independent Board Committee to advise the Independent Shareholders as to whether the terms and Proposed Annual Caps of each of the Continuing Connected Transactions (save for the Financial Services by the CSSC Group) contemplated under the 2020-2022 Framework Agreement as set out in the Circular as to the fairness and reasonableness and to recommend whether or not the Independent Shareholders should approve the terms and Proposed Annual Caps of each of the Continuing Connected Transactions (save for the Financial Services by the CSSC Group) contemplated under the 2020-2022 Framework Agreement as set out in the Circular. Vinco Capital has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

We wish to draw your attention to the letter from the Board, as set out on pages 6 to 44 of this Circular and the text of a letter from the Independent Financial Adviser, as set out on pages 47 to 81 of this Circular, both of which provide details of the 2020-2022 Framework Agreement and the Continuing Connected Transactions (together with the Proposed Annual Caps). Your attention is also drawn to the additional information set out in the Appendix II to the Circular.

Having considered the terms of the 2020-2022 Framework Agreement and the Continuing Connected Transactions (together with the Proposed Annual Caps), the advice of the Independent Financial Adviser and the relevant information contained in the letter from the Board, we are of the opinion that the terms and the Proposed Annual Caps of each of the Continuing Connected Transactions (save for the provision of the Financial Services by the CSSC Group) contemplated under the 2020-2022 Framework Agreement are on normal commercial terms and are fair and reasonable and it is in the interests of the Company and the Shareholders as a whole.

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Accordingly, we recommend the Independent Shareholders to vote in favour of the relevant resolutions for approving each of the Continuing Connected Transactions (save for the Financial Services provided by the CSSC Group) and the Proposed Annual Caps contemplated under the 2020-2022 Framework Agreement to be proposed at the EGM.

Yours faithfully

For and on behalf of the

Independent Board Committee

Mr. Yu Shiyou

Independent non-executive Directors

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the text of a letter of advice from Vinco Capital to the Independent Board Committee and the Independent Shareholders in connection with the terms and the Proposed Annual Caps of each of the Continuing Connected Transactions (save for the Financial Services by the CSSC Group) contemplated under the 2020-2022 Framework Agreement for the purpose of incorporation in this circular:

Vinco Capital Limited

Unit 2610, 26/F., The Center

99 Queen's Road Central, Hong Kong

5 February 2020

To the Independent Board Committee and the Independent Shareholders of

CSSC Offshore & Marine Engineering (Group) Company Limited

Dear Sirs,

MAJOR TRANSACTION AND

NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS UNDER

THE 2020-2022 FRAMEWORK AGREEMENT

1. INTRODUCTION

We refer to our engagement as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the terms and Proposed Annual Caps of each of the Continuing Connected Transactions (save for the Financial Services by the CSSC Group) (the "Non-ExemptContinuing Connected Transactions") contemplated under the 2020-2022 Framework Agreement, details of which are set out in the "Letter from the Board" in the circular (the "Circular") issued by the Company to the Shareholders dated 5 February 2020 of which this letter forms part. Capitalised terms used in this letter shall have the same meanings ascribed to them in the Circular unless the context otherwise requires.

Reference is made to the announcements of the Company dated 30 December 2019 in relation to, among other things, the terms and the Proposed Annual Caps of each of the Non-Exempt Continuing Connected Transactions contemplated under the 2020-2022 Framework Agreement. The 2017-2019 Framework Agreement which governs the Continuing Connected Transactions between the Group and the CSSC Group has expired on 31 December

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

2019. As such, the Company and CSSC entered into the 2020-2022 Framework Agreement to continue and to govern the Continuing Connected Transactions between the Group and the CSSC Group for the period from 1 January 2020 to 31 December 2022.

Listing Rues Implication

The provision of Financial Services by CSSC Group provided by CSSC Group to the Group under the 2020-2022 Framework Agreement constitutes financial assistance received by the Group from a connected person. As (i) the provision of Financial Services by CSSC Group is to be provided to the Group on normal commercial terms that are comparable to or more favourable than those offered by Independent Third Parties for similar services in the PRC and

1. no security over the assets of the Group is granted or no guarantee fee is required in respect of the Financial Services, the Financial Services by CSSC Group to be provided by CSSC Group to the Group under the 2020-2022 Framework Agreement are exempt from reporting, announcement and Independent Shareholders' approval requirements under Rule 14A.90 of the Hong Kong Listing Rules.

As the applicable percentage ratios calculated pursuant to Rule 14.07 of the Hong Kong Listing Rules for the Proposed Annual Caps of the Non-Exempt Continuing Connected Transactions under the 2020-2022 Framework Agreement are higher than 5% on an annual basis, the transactions relating to the Continuing Connected Transactions (save for the provisions of the Financial Services by the CSSC Group) contemplated under the 2020-2022 Framework Agreement constitute non-exempt continuing connected transactions of the Company that are subject to reporting, announcement and Independent Shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules.

As the applicable percentage ratios for the Proposed Annual Cap of the maximum value of the entrusted assets management under the 2020-2022 Framework Agreement exceeds 5% but less than 25% calculated pursuant to Rule 14.07 of the Hong Kong Listing Rules, the Proposed Annual Caps in relation to the maximum value of the entrusted assets management under the 2020-2022 Framework Agreement constitute a non-exempt continuing connected transaction and also a discloseable transaction of the Company and are subject to reporting, announcement and Independent Shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules and subject to the relevant discloseable transaction requirements under Chapter 14 of the Hong Kong Listing Rules.

As the applicable percentage ratios in relation to each of the aggregate of maximum daily balance on the Deposits and maximum daily balance on the FX Contracts under the 2020-2022 Framework Agreement exceed 25% but less than 75% calculated pursuant to Rule 14.07 of the Hong Kong Listing Rules, the Proposed Annual Caps in relation to each of the aggregate of maximum daily balance on the Deposits and maximum daily balance on the FX Contracts under the 2020-2022 Framework Agreement constitutes a non-exempt continuing connected transaction and also a major transaction of the Company and are subject to reporting, announcement and Independent Shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules and subject to the relevant major transaction requirements under Chapter 14 of the Hong Kong Listing Rules.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

discloseable and connected transaction in relation to the entering into the phase I relocation agreement of Guangzhou Wenchong Shipyard Co., Ltd; (iii) a discloseable and connected transaction in relation to the increase of registered capital and shareholding structure adjustments to each of GSI and Huangpu Wenchong; the non-exercise of right of first refusal; and a major and connected transaction in respect to the terms of the disposal agreement of GSI; and (iv) a discloseable and connected transaction in relation to the entering into the land resumption compensation agreement (the "Past Appointments"). Details of the relevant transaction is set out in the circular of the Company dated 14 November 2018, 10 May 2019, 4 October 2019 and 9 December 2019 respectively. The normal professional fees in connection with the Past Appointments have been fully settled and we are not aware of the existence of or change in any circumstances that would affect our independence. Accordingly, we consider that we are eligible to give independent advice on the Proposed Annual Caps of each of the Non-Exempt Continuing Connected Transactions contemplated under the 2020-2022 Framework Agreement.

1. BASIS OF OUR OPINION AND RECOMMENDATION

In forming our opinion and recommendation, we have relied on the information, facts and representations contained or referred to in the Circular and the information, facts and representations provided by, and the opinions expressed by the Directors, management of the Company and its subsidiaries. We have no reason to believe that any information and representations relied on by us in forming our opinion is untrue, inaccurate or misleading, nor are we aware of any material facts, the omission of which would render the information provided and the representations made to us untrue, inaccurate or misleading.

We have assumed that all information, facts, opinions and representations made or referred to in the Circular were true, accurate and complete at the time they were made and continued to be true, accurate and complete as at the date of the circular and that all expectations and intentions of the Directors, management of the Company and its subsidiaries, will be met or carried out as the case may be. We have no reason to doubt the truth, accuracy and completeness of the information, facts, opinions and representations provided to us by the Directors, management of the Company and its subsidiaries. The Directors have confirmed to us that no material facts have been omitted from the information supplied and opinions expressed. We have no reason to doubt that any relevant material facts have been withheld or omitted from the information provided and referred to in the Circular or the reasonableness of the opinions and representations provided to us by the Directors, management of the Company and its subsidiaries.

We also sought and received confirmation from the Directors that no material facts have been omitted from the information supplied and opinions expressed. We have relied on such information and opinions and have not, however, conducted any independent verification of the information provided, nor have we carried out any independent investigation into the business, financial conditions and affairs of the Group or its future prospect.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

contemplated under the 2017-2019 Framework Agreement, on 30 December 2019, the Company and CSSC entered into the 2020-2022 Framework Agreement to continue and to govern the Continuing Connected Transactions between the Group and the CSSC Group for the period from 1 January 2020 to 31 December 2022. The 2020-2022 Framework Agreement announced on 18 November 2019 ("Previous 2020-2022 Framework Agreement") is conditional upon the approval by Independent Shareholders at an extraordinary general meeting of the Company and as such condition is not fulfilled, the Previous 2020-2022 Framework Agreement has never came into effect prior to the date of the 2020-2022 Framework Agreement.

Moreover, as disclosed in the announcement of the Company dated 25 October 2019, on 25 October 2019, the Company received a letter from CSSC stating that CSSC had received a according to the "Notice regarding the reorganization of CSSC and CSIC" issued by the SASAC (《關於中國船舶工業集團有限公司和中國船舶重工集團有限公司重組的通知》(國資 改革(2019)100號) issued by the SASAC, the reorganisation of CSSC and CSIC has been implemented in October 2019. In October 2019, the SASAC has also issued the "Announcement regarding the approval of the reorganization of CSSC and CSIC" (《關於中 國船舶工業集團有限公司和中國船舶重工集團有限公司聯合重組獲得批准的公告》). Upon approval by the SASAC, it was agreed that CSSC performs joint restructuring with CSIC to newly set up China State Shipbuilding Corporation Limited* (中國船舶集團有限公司) ("China Shipbuilding Group"). The SASAC shall perform the duties of the contributor on behalf of the State Council, and CSSC and CSIC will be integrated into China Shipbuilding Group. In November 2019, China Shipbuilding Group has been established and completed the registration at the State Administration for Industry and Commerce of PRC. As disclosed in the announcement of the Company dated 25 October 2019, upon the restructuring, the controlling shareholder and de facto controller of the Company will remain unchanged. On 8 November 2019, the members of the boards of directors, supervisors and senior management of the China Shipbuilding Group was appointed and the members of the boards of directors, supervisors and senior management of each of CSSC, CSIC and the China Shipbuilding Group were the same. The ultimate beneficial owner of the China Shipbuilding Group is the SASAC at the Latest Practicable Date. As at the Latest Practicable Date, the restructuring is still on-goingand the transfer of shares of the CSSC from the SASAC to the China Shipbuilding Group and the transfer of shares of the CSIC from the SASAC to the China Shipbuilding Group have not been completed. As such, immediately after the restructuring, the China Shipbuilding Group will hold 100% of the issued shares of CSSC and 100% of the issued shares of CSIC and CSSC will hold 59.97% of the issued Shares of the Company. Hence, the China Shipbuilding Group will become a substantial shareholder and a connected person of the Group and the transactions between the China Shipbuilding Group and the Group will become continuing connected transactions immediately after the restructuring.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The continuing connected transactions contemplated under the 2020-2022 Framework Agreement ("Continuing Connected Transactions") and each a "Continuing Connected Transaction" are categorised as follows:

Products and services to be provided by the Group to the CSSC Group:

1. Provision of shipping products, electrical and mechanical engineering equipment, and metallic materials, includes shipping products, complete sets or accessories of electrical and mechanical engineering equipment, steel products, non-ferrous metal products etc., part of the accessories and equipment primarily for use on ships and sale of waste materials through CSSC Group; disposing fixed assets that are not in use by the Group to the CSSC Group;
2. Utilities, primarily the supply of wind, water and electrical power and gas; and
3. Provision of production areas and staff quarters leasing service, labour supply, environmental business such as land restoration, design and technical services:
4. 1. Leasing: provision of certain production areas and staff quarters leasing service by the Group to the CSSC Group, its joint ventures and associates;
   2. Labour supply: primarily involves the provision of training, short-term labour supply, shipbuilding services etc.; the Group may provide to the CSSC Group the skills training and assessment, technical services relating to the business of the CSSC Group; short-term labour supply will be provided by the Group when the CSSC Group is in short of labour force for shipbuilding services provided the Group has excess labour force at the same time; and
   3. Technical services: mainly involves installation, usage and maintenance services and the provision of shipbuilding products and other engineering design or environmental business, such as land restoration, research and development services and professional services, software development, and relevant technical services.

Products and services to be provided by the CSSC Group to the Group:

1. Provision of equipment for ship, electrical and mechanical engineering equipment, accessories and resources etc., comprising primarily complete sets or accessories of resources, accessories, production machineries required for production, tools and logistic services for ship-building, environmental protection, and heavy equipment production of the Group when the Group is short of supply of resources for its production due to late delivery by the supplier or temporary demand for the resources, the resources will be provided by the CSSC Group provided that the CSSC Group has excess resources at the same time; and

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

1. Provision of production areas and equipment leasing service, labour supply and technical services:
2. 1. Leasing: lease of certain production sites and together with necessary production equipment to the Group and the ancillary water and electricity power, etc.;
   2. Labour supply: subcontracting of shipbuilding works by section (or steel structure works) refers to, in the event that the Group's shipbuilding production is constrained by limited resources, such as workshop, equipment or labour force, such resources will be provided to CSSC or its subsidiaries in order to keep up with the production plan; Comprehensive Services;
   3. Technical services: the provision of technical services by the CSSC Group mainly involves the provision of shipbuilding products and other engineering design and relevant technical services, including in the event that the Group's production is constrained by design techniques and time, the CSSC Group will provide such service in order to keep up with production plan, the CSSC and the CSSC Group will form a unit for development of new products and the provision of subcontracting management, equipment production, design, exploration and audit consultancy services for related utility projects;

Financial Services to be provided by the CSSC Group to the Group:

1. (i) Maintaining Deposits with CSSC Finance;
2. 1. Providing Loans Granted by CSSC Finance and CSSC Group;
   2. Providing other financial or credit services which primarily includes the advance(s) provided to the Group from CSSC Finance directly, or payment(s) of compensation(s) and/or provision of indemnity(ies) in respect of any payment obligations which may arise out of the business activities carried on by the Group such as loans, trade finance, bill financing, finance leases, overdrafts, trade advances, promissory notes, letters of credit, guarantees, standby letters of credit, letters of credit confirmation, guarantees in bonds issuance, loan guarantees, asset sales with legal recourses, un-utilised irrevocable loan commitments, etc;
   3. Entering into FX Forward Contract(s) by CSSC Finance with the Group; and
   4. Providing entrusted assets management service to manage the entrusted assets through tailor-madevalue-adding asset management plan and strategy.
3. Guarantees services, which refers to the events that the Group receives orders or borrowing funds from banks and the Group is required to have a guarantor, the CSSC Group may provide guarantee service in these events.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

in the transaction amount of the current continuing connected transactions between GSI and the CSSC Group as such transactions will cease to become connected transactions of the Company after the Disposal of GSI; and (iv) the expected decrease in disposal of furnished shipping products between the Group and the CSSC Group.

In relation to the Proposed Annual Cap for the year ending 31 December 2022 in the amount of RMB2,673.54 million which represents a decrease of approximately 24% as compared to the year ending 31 December 2021, is based on (i) the future plan of Huangpu Wenchong; and (ii) the Group's projected production and operation capacity and the ship market future prospects; and (iii) it is expected that there will be no disposal of furnished shipping products between the Group and the CSSC Group.

Based on the above, we are of the view that the basis adopted to determine the Proposed Annual Caps in respect of the provision of electrical and mechanical engineering equipment and metallic materials, and sale of waste recycling materials for the three years ending 31 December 2022 will be based on market price and is fair and reasonable so far as the Independent Shareholders are concerned.

1. Utilities, primarily the supply of wind, water and electrical power and gas

In the course of its operations and provision of services, the Group shall provide utilities facilities of wind, water, electricity and gas to the CSSC Group. The fees for provision of utilities (primarily supply of wind, water and electrical power and gas) by the Group to the CSSC Group is based on the utilities' costs of the Group supplied to the CSSC Group plus a management fee ranging from 20% to 25% above the cost of the relevant type of utilities which is based on the expenses, administrative costs and other miscellaneous expenses involved in the provision of utilities with reference to the internal operational budget and measures formulated by the Company and after arm's length negotiation or in terms no more favourable than those offered to Independent Third Parties.

Given that the Group is not principally engaged in provision of utilities facilities, the 20% to 25% margin on the fees primarily represents the CSSC Group's share of the expenses involved in overall generation of such utilities facilities. Such margin has been agreed after arm's length negotiation between the Group and the CSSC Group, is considered as fair and reasonable to defray the relevant administrative costs and the miscellaneous expenses (including maintenance costs and depreciation charges) from time to time incurred by the Group for provision of such utilities facilities the Group. As stated in the Letter from the Board, the payment will be made per month or per quarter, taking into account of the quantity of utilities consumed by the Group. We are of the view that it is not uncommon of requesting payment in a regular period of time due to the nature of the transaction.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

1. Provision of leasing, labour supply, design and technical services

The primary purpose for provision of production areas and staff quarters leasing service by the Group to the CSSC Group is to fully utilize certain properties held by the Group to gain cost efficiency on those properties. The Group will provide to the CSSC Group labour supply services, primarily providing training and supplying short-term labourers, shipbuilding services etc. According to the demands for technicians, the Group may provide to CSSC Group services for staff training and appraisals and technical services relating to business of the Group and short-term labour supply when the CSSC Group is in short of labour force for shipbuilding services. Besides, the Group will provide technical services such as installation, usage and maintenance services and design, research and development, self-developed software and related technical services of shipping products or other engineering in relation to the business of the Group to the CSSC Group from time to time. The Directors are of the view that the provision of such services to the CSSC Group enable the Group to maximize the use of labour and to capitalise on its excess production capacity and existing shipbuilding-related techniques to earn additional revenue for the Group.

As set out in the Letter from the Board, the pricing of labour supply by the Group to the CSSC Group will be based on terms not less favourable compared with Independent Third Parties. To elaborate further, the rental of the lease shall be based on market price with reference to Zhaoshang800* (中工招商網) (Zhaoshang800.net) with reference to the depreciation cost and amortization of assets and other expenses and after arm's length negotiation. We have reviewed the lease agreement noted that the leasing fee was determined by the parties at arm's length negotiation with reference to the production area nearby, the deprecation costs and the reasonable profit margin considered by the Group. According to the research on the leasing fee of similar production area in the market to the extent that a comparison can be made (subject to similar nature, location, size of land, structure of the building and so forth), the Company shall use its best effort to determine whether the leasing fee offered by the Group is fair and reasonable, and is similar to or more favourable than those offered by the independent third parties. We have reviewed the search conducted by the Company and noted that the management approved the leasing fee to be offered to the CSSC group is no less favourable compared with Independent Third Parties. As advised by the Company, when determining the pricing term, the Company will consider factors like the skill required and the then supply and demand on the market, and make reference to the then prevailing average wage rate published by Statistical Bureau of Guangzhou Municipality (廣 州市統計局). For labours without special skills, references will be made to the average wage of general workers while for labours with specialised skills required in shipbuilding, references will be made to the average wage of shipbuilding workers within Guangzhou area. The contract review committee of the Company will review and scrutinize quotations offered by the Group to the CSSC Group against those provided by the Group to Independent Third Parties to seek to ensure that the Manual and the Contract Management Rules are complied with. Pricing for provision of design and technology services by the Group to the CSSC Group will primarily be based on certain fee formulae prescribed in the Manual. As the Directors understand, the fee formulae prescribed in the Manual are principally based on, among others, the skills required,

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As per our discussion with the management of the Group, the Group has certain design expertise that the CSSC Group requires for shipbuilding design. The CSSC Group has provided the Group its estimated demand of design service based on its own production forecast.

In order to access the fairness and reasonableness of the Proposed Annual Caps, we have conducted our own salary research related to the labour market price in the PRC.

According to Statistical Bureau of Guangzhou Municipality's announcement of the statistics of the average salary in Guangzhou Province, there is a decrease in average salary from approximately 10.9% in the year ended 31 December 2017 to approximately 8.9% in the year ended 31 December 2018. Therefore, we noted that based on the data published by Statistical Bureau of Guangzhou Municipality, it is acceptable for the Company to take into consideration the expected decrease in the salary expense when determining the Proposed Annual Caps.

We have reviewed several contracts in relation to the land restoration, design and technical services entered by the Group and the CSSC Group for the three years ending 31 December 2022 and the corresponding calculation on the existing and future transactions. We noted that approximately 96.5% of the total annual cap is secured with signed contracts. We have also reviewed the transactions occurred in the two years ended 31 December 2018 and 11 months ended 30 November 2019 and concur with the view of the management of Company that the historical transactions should be taken into account of the proposed annal caps as they are expected to be continued in the coming three years, that is approximately 2.3% of the total annual cap.

Based on the above, we are of the view that the basis adopted to determine the Proposed Annual Caps in respect of the provision of leasing, labour supply, design and technology services to the CSSC Group for the three years ending 31 December 2022 is fair and reasonable so far as the Independent Shareholders are concerned.

Products and services provided by the CSSC Group to the Group:

1. Provision of equipment for ship, electrical and mechanical engineering equipment, accessories and resources etc., comprising primarily complete sets or accessories of resources, accessories, production machineries required for production, tools and logistic services for ship-building in the daily production of the Group; when the Group is short of supply of resources for its production due to late delivery by the supplier or temporary demand for the resources, the resources will be provided by the CSSC Group provided that the CSSC Group has excess resources at the same time

The Group sources from the CSSC Group shipping equipment, electrical and mechanical engineering equipment, accessories and resources mainly includes complete sets or accessories of resources, accessories, production equipment and tools for ship production, etc.. The Group also uses logistics and related services, etc. provided by the CSSC Group. The Group sources these types of equipment and services from the CSSC Group and also from other independent suppliers so as to meet its routine and urgent needs.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As stated in the Letter from the Board in relation to the products and services to be provided from (a) the Group to CSSC Group and (b) CSSC Group to the Group, the nature of the work varies in terms of the scope of main operation and market positioning. We understand from the management of the Company that the main business of the Group is shipbuilding and non-shipping businesses which mainly consists of provision of self-build marine products, mechanical and electrical equipment (mainly pumps and cranes) and provision of the technical services for the joint research and development unit of thematic research projects assigned by the government; whereas the main business of the CSSC Group is provision of the shipbuilding supporting materials, equipment, technologies, services and so forth, which includes but is not limited to provision of main materials (such as steel) required for shipbuilding and equipment (such as engine) and technical services related to ship. Since the nature of the works provided by the Group and the CSSC Group is different, there is a need for them to receive and offer the products and services from and to each other accordingly.

Considering that (i) the CSSC Group is centralised in manufacturing some of such equipment and (ii) the CSSC Group is able to obtain competitive prices on certain materials by making bulk order through its centralized purchase system, the Directors are of the view that the CSSC Group has the capacity to supply various shipbuilding materials or to provide necessary services when the Group has the production needs. Likewise, the Directors are of the view that it is more cost-effective to purchase of materials and equipment through bulk purchase by the CSSC Group.

The Group also sources the products and services described in above from other Independent Third Party suppliers from time to time. Nevertheless, as the CSSC Group is either specialised in manufacturing some of such equipment and, or as the case may be, has a centralised purchase system for purchase of the required materials in bulk so as to obtain competitive prices, the Directors are of the view that it would be more cost-effective for the Group to purchase various shipbuilding materials and equipment from the CSSC Group.

As stated in the Letter from the Board, the pricing policies of the procurement of the relevant equipment, materials and services are as follows:

1. pricing of electrical and mechanical engineering equipment and metallic materials will be based on market price which is with reference to the Shanghai Metals Market and determined and selected according to the production specifications and after arm's length negotiation. The Company will obtain one or more quotations from the Independent Third Parties;
2. pricing of steel components or accessories for ship, considering the low unit price and the short order time, the price will be determined between the parties annually based on actual costs taking into account the market price of raw materials which is with reference to online data such as Steel Home* (鋼之家) (steelhome.cn) and Mysteel* (我的鋼鐵) (mysteel.com) and the specification of the production needs of the Group and after arm's length negotiation. The Company will obtain one or more quotations from the Independent Third Party;

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

priced to the Group would be not less favourable than those offered to Independent Third Parties or only charged based on the actual costs incurred by the CSSC Group. Therefore, we are of the view that the pricing policy for the Comprehensive Services is on normal commercial terms.

As set out in the Letter from the Board, the general payment terms are that the invoice will be issued after the entering into the lease agreement and the rental payment will be made in specific time intervals (such as monthly, quarterly or yearly). For labour supply and technical services, the general payment terms are that invoice will be issued after the obligations under the relevant agreements are fulfilled. For long-term labour supply agreement, the general payment terms are that the payment will be made after the end of a specific time interval (such as every month or every quarter) and with reference to the amount of labour supply provided, and payment will be made after the issuance of the invoice. We are of the view such payment are fair and reasonable, on normal terms or better and in the interests of the Company and the Shareholders as a whole due to its nature of the transactions.

Based on the above, we are of the view that the aforesaid terms of lease of production areas and equipment, labour supply, design and technical services, and Comprehensive Services by the CSSC Group are on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned and the said transactions are in the interests of the Company and the Shareholders as a whole.

Proposed Annual Caps

As set out in the Letter from the Board, the Proposed Annual Caps in respect of the lease of production areas and equipment, labour supply, design and technical services, and Comprehensive Services by the CSSC Group for the three years ending 31 December 2022 are RMB327.84 million, RMB282.12 million and RMB321.63 million respectively.

According to the property leasing contract obtained from the Company, we find that the contracts signed by the Group and the CSSC Group covered for period from January 2015 clearly stated the calculation of the leasing fee which the Group would pay to the CSSC Group and we have also obtained the breakdown of the leasing fee to be paid in each year according to the calculation formula stated in the signed contract that the Group and the CSSC should determine the annual leasing fee by considering but not limited to below factors, the depreciation expenses, amortisation costs and the tax fees of approximately 6%. The annual fee for leasing of production areas is based on the amounts agreed to be paid to the CSSC Group according to the calculation formula instructed in the signed contract dated 1st January 2015.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We have reviewed the lease agreement and noted that the leasing fee is determined by using the amortisation expense and/or depreciation expense (where appropriate) of the properties and tax expenses without any profit margin to be paid to the CSSC Group. Since the leasing fee does not consist of any profit to the connected parties, the Company believes it is not necessary to make comparison with Independent Third Parties. Also, according to the leasing contracts and the corresponding calculation of the value of right-of-use assets provided by the Company, we noted that the basis for determining the annual caps for the provision of certain production areas and staff quarters leasing services by the CSSC Group to the Group is on the total value of right-of-use assets recognised by the Group.

In order to access the fairness and reasonableness of the Proposed Annual Caps, we have conducted our own salary research related to the labour market price in the PRC.

According to Statistical Bureau of Guangzhou Municipality's announcement of the statistics of the average salary in Guangzhou Province, there is a decrease in average salary from approximately 10.9% in the year ended 31 December 2017 to approximately 8.9% in the year ended 31 December 2018. Therefore, we noted that based on the data published by Statistical Bureau of Guangzhou Municipality, it is acceptable for the Company to take into consideration the expected decrease in the salary expense when determining the Proposed Annual Caps.

As stated in the Letter from the Board, similar to the provision of equipment for ship, electrical and mechanical engineering equipment and metallic materials, shipbuilding accessories, etc. by the CSSC Group to the Group, the Proposed Annual Caps for leasing of production areas, provision of labour supply, design and technical services and Comprehensive Services by the CSSC Group to the Group has taken into account of the operational orders received by Huangpu Wenchong and the estimated total shipbuilding orders to be received by the Group. As at the Latest Practicable Date, there were on-going transactions in relation to the leasing of production areas, provision of labour supply, design and technical services, and Comprehensive Services by GSI to the Company and Huangpu Wenchong. As disclosed in the circular of the Company dated 4 October 2019, GSI will become a 51% non-wholly owned subsidiary of CSSC Holdings, which will be 47.11% owned by CSSC immediately upon completion of the Disposal of GSI and the issuance of the Consideration Shares, hence GSI will become a connected person of the Company. The existing transactions between the Company or Huangpu Wenchong with GSI will then become connected transactions. The three years ending 31 December 2022 have taken into account the existing transactions between the Company or Huangpu Wenchong with GSI which will become continuing connected transaction subsequent to the Disposal of GSI. As per our discussion with the management of the Group, the CSSC Group has certain design expertise that the Group requires for shipbuilding design. Therefore, according to the Three-Year Schedule, the Group is able to estimate the design services required by it from the CSSC Group by the types of ship model to be built in the coming three years.

We have reviewed several contracts in relation to the lease of production areas and equipment, labour supply, design and technical services, and Comprehensive Services for the three years ending 31 December 2022 and the corresponding calculation on the existing and future transactions. We noted that approximately 70.4% of the total annual cap is secured with

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

2. Sale and purchase of FX Forward Contracts

As mentioned in the Letter from the Board, the Company's ship export orders are denominated in US dollars and some domestic ship orders are also denominated in RMB with reference to US dollars. As such the Group was subject to high exchange rate risk. The Group entered into FX Forward Contracts with Independent Third Party banks and/or the CSSC Finance to hedge against its currency risk in the past. As CSSC Finance obtained the licence to trade in FX Forward Contract in July 2014, the Company proposes to enter into FX Forward Contracts with CSSC Finance. The FX Forward Contracts require no initial cash outlay or purchase cost. The principal terms of the FX Forward Contracts and the transaction process are as follows: the Group will first enquire from Independent Third Party bank and CSSC Finance as to the exchange rate, transaction period and transaction amount regarding specific currency whenever it intends to enter into a FX Forward Contract. If the terms are more favourable than those offered by Independent Third Parties to the Group, the Group will enter into FX Forward Contracts with CSSC Finance. For each FX Forward Contract with CSSC Finance, there will be one transaction between the Group and CSSC Finance. Such transaction will take place on a pre-agreed transaction date. CSSC Finance will not charge any handling fee on the FX Forward Contracts.

Based on our discussion with the Company, the nature of the FX Forward Contracts is derivatives, whose settlement is based on the difference between the forward exchange rate at the establishment and the spot exchange rate at the time of settlement so as to limit the currency risk of the Group. The Group's ship export orders are denominated in US dollars, where some of the domestic ships orders are denominated in USD but payable in RMB. The Group's exposure is that there is a fixed currency rate for the FX Forward Contracts for not more than 80% of the contracted amount and the payment for the remaining 20% of the contracted amount will be with reference to the relevant currency rate at the date of payment in general. CSSC Finance will enter into the FX Forward Contracts with the Group and provide the currency requested in the contract.

The number of contracts to be entered with CSSC Finance depends on the hedging needs of the Group. In particular, it depends on the timings of inflow of cash denominated in US dollars from the Group's operations and outflow of cash denominated in RMB for the Group's operating cost. In order to mitigate the currency risk having regard to the timing of operating cash inflows denominated in US dollars and outflows denominated in RMB and to lock up our profit margin, contracts of different size and timing may be needed. The Group will decide the number of contracts to be entered with CSSC Finance according to the schedule of payments from customers or to suppliers and/or subcontractors throughout the year.

The Group will also continue to enter into FX Forward Contracts with Independent Third Party banks if and when appropriate. The Group will compare the terms offered by Independent Third Party banks with the terms offered by CSSC Finance before deciding on whether to enter into FX Forward Contracts with CSSC Finance. In view of this, the Directors consider that the

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

account of the expected decrease in transaction amount of the current continuing connected transactions between the Company and the CSSC Group as transactions between GSI and CSSC Group will cease to become connected transactions of the Company after the Disposal of GSI, we concur with the Company's estimation that the Proposed Annual Caps in FX Forward Contracts to be set at RMB4,740.56 million, RMB800.00 million and RMB800.00 million for the three years ending 31 December 2022 respectively.

Based on the above, we are of the view that the basis for determining the Proposed Annual Caps for the sale and purchase of FX Forward Contracts is fair and reasonable so far as the Independent Shareholders are concerned and such transactions are in the interests of the Company and the Shareholders as a whole.

3. Entrusted assets management services

Pursuant to the 2020-2022 Framework Agreement, the Group would be offered entrusted assets management services by CSSC Finance, which shall be responsible for the management of assets under custody through tailor-made and value-added asset management plans and strategies. As advised by the Company, as part of its treasury management measures and to take advantage of CSSC Finance's experience in providing financial services to the CSSC Group and the Group has historically engaged CSSC Finance to provide entrusted assets management services with a view to generating stable income from certain unutilised funds which were not essential for its operations.

As stated at the Letter from the Board, the Group has engaged CSSC Finance to provide entrusted assets management services in order to generate incomes from certain unutilised funds. The principal terms of the entrusted assets management service are as follows: The Group will entrust CSSC Finance with certain assets for an agreed period of time. CSSC Finance will invest the entrusted assets with designated types of low risk investment products available in the market in order to maximise the profitability of such entrusted assets. CSSC Finance will issue monthly statement to the Group to report the status of investments during the entrusted term. The pricing of fees charged for providing entrusted asset management services shall be determined by the parties by making reference to market price which is with reference to such rate as published by PBOC and the Company will obtain one or more quotations from the Independent Third Party. The Directors are of the view that it is in the interest of the Company and its Shareholders as a whole to continue to leverage on CSSC Finance's expertise to provide entrusted assets management services.

Based on our review of (i) quotations from Independent Third Parties for similar asset management services; and (ii) the Group's records on the historical performance of such services provided by CSSC Finance, we note that the asset management products provided by CSSC Finance to the Group was primarily principal-protected products with duration of not more than three years, and the actual return produced by CSSC Finance was not less favourable

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Agency services to be provided by the CSSC Group to the Group:

1. Agency services in relation to the Group's ship sales and imported materials purchases

The Group uses to leverage on the CSSC Group's reputation in the international shipbuilding market, its long established relationships with ship owners and its bargaining power to sell the Group's products. Therefore, the Directors are of the view that it is in the interest of the Company and its Shareholders as a whole to continue to use the agency services provided by the CSSC Group.

1. Agency services for sale of ships through the CSSC Group

In addition to selling its products through its own sales team, the Group has also been utilising the agency services offered by the CSSC Group as an alternative sales channel for their respective products. Pricing of sales agency fees or commission is determined and agreed based on arm's length negotiation between the parties, having reference to the then prevailing rate of brokerage fees at the time of entering into specific transactions. The rate of brokerage fee will vary according to the size and type of vessels and usually a lower rate will be charged for sale of larger vessels or where the technical requirement is comparatively generic. The Group will also consider the terms offered by other independent service providers and choose to transact with the counterparty which offers more favourable terms that are in the Group's interest.

As advised by the Company, since the listing of the Company's H Shares on the Hong Kong Stock Exchange, the Group has been utilising the agency services offered by the CSSC Group for the sale of their respective products. According to the Letter from the Board, the pricing of sales agency fees or commissions charged pursuant to the 2020-2022 Framework Agreement will not exceed 1.5% of the contract price. We understand from the Company that the fees charged may be lower for agency fees charged for larger vessels. According to the Company, the sales agency fees have been determined after arm's length negotiations between the Group and the CSSC Group.

We have also reviewed the sales forecast provided by the Group in relation to agency services in selling the Group's product and noted that the agency fee to be charged by CSSC Group. Company would be amounted to 1.5% or less of the total cost of the product. We consider the sales agency fee of 1.5% or less of the contract price of each sale transaction is not less favourable than the general trend pricing. We have reviewed the internal control document provided by the Company on the agency fee, it stated that for the worldwide industry practice, the agency fee shall be over 1.5% of the contract price and be paid in according to the shipbuilding progress of the vessel in question. Therefore, we are of the view that the pricing of sales agency fees or commissions of the CSSC Group follows the worldwide industry practice and the internal contract guideline on agencies.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

customers' demand, the Group usually appoints agents, including companies in the CSSC Group and Independent Third Parties, to assist the sourcing and purchasing of such imported materials. The Directors are of the view that it is in the interest of the Company and the Shareholders as a whole to continue to use the agency services provided by the CSSC Group as one of its sources of imported materials.

As set out in the Letter from the Board, pricing of purchase agency fee is determined and agreed based on arm's length negotiation between the parties, having reference to the then prevailing market practices. However, counterparty which offers the lowest agency fee shall not be the sole determining factor. In deciding whether the Group will choose to transact with any particular counterparty, the Group will consider in totality the terms offered by counterparty for purchase of imported materials for the Group including the delivery schedule(s) of the imported materials, whether the counterparty will advance payment of the purchase price in foreign currency on the Group's behalf and the payment terms available to the Group, etc. The purchasing department and the relevant deputy general manager of the Group will be responsible for reviewing and scrutinizing the terms offered by the CSSC Group to the Group against those provided to the Group by third party service providers for providing similar services in order to seek to ensure that the Group can obtain the most favourable terms available at the relevant time and that, among others, the Contract Management Rules are complied with.

Also, as advised by the Company, the pricing of purchase agency fee of the Group and the CSSC Group will be based on agreed fee shall also follow the worldwide industry practice and be 1% to 2% of the contract price. We have randomly selected and reviewed three agency agreements provided by the Company in respect of imported materials procurements between the Group and the CSSC Group and Independent Third Parties respectively and noted that the agency fee rates charged by the CSSC Group to the Group and the Independent Third Parties is based on agreed fee and followed the worldwide industry practice and fell within the range of 1% to 2% of the contract price.

As we note from the said agency agreements from the Company, the CSSC Group offered normal payment terms as compared with the relevant Independent Third Parties. Taking account of the above, we concur with the Company that the terms contained in the agency agreements with the CSSC Group for the purchase of imported materials are no less favourable compared with those entered into with Independent Third Parties.

As set out in the Letter from the Board, the general payment terms are pursuant to the agreed percentage of the procurement as agency service fee in the relevant agreements. It is not uncommon to practice such payment terms in similar industry.

Based on the above, we are of the view that the terms of the agency fee for purchase of imported materials are on normal commercial terms, fair and reasonable so far as the Company and the Independent Shareholders are concerned, and the use of agency services provided by the CSSC Group is in the interests of the Company and the Shareholders as a whole.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Proposed Annual Caps

As set out in the Letter from the Board, the Proposed Annual Caps in respect of the provision of agency fee for procurement of imported materials is RMB3.74 million, RMB3.30 million and RMB3.83 million for the three years ending 31 December 2022.

As advised by the Company, the above Proposed Annual Caps are determined with reference to the expected amount of imported materials required by the Group for its expected production during the three years ending 31 December 2022, taking into account of the anticipated increase in production capacity, shipbuilding output and the Disposal of GSI. The Company has further advised that the amount of imported materials is expected to slightly increase due to the increasing number of shipbuilding orders requesting the use of imported materials. Based on the above, we are of the view that the basis for determining the Proposed Annual Caps relating to the agency fee for purchase of imported materials is fair and reasonable so far as the Independent Shareholders are concerned.

INTERNAL CONTROL PROCEDURES

As confirmed by the management of the Company, the Company will follow a series of procedures (including the Contract Management Rules) and a series of risk management arrangements in accordance with the regulatory requirements, endeavour to maintain in independency in decision-making as well as the fairness of the prices and terms of each Continuing Connected Transaction.

Such arrangements shall include:

1. each Continuing Connected Transaction contemplated under the 2020-2022 Framework Agreement shall be conducted on a non-exclusive basis. As confirmed by the management, the Group has the flexibility to enter into arrangement with third party for purchasing or selling equipment and materials and/or provision of services as it deems fit;
2. the pricing mechanism is transparent and the implementation of such pricing mechanism is subject to strict scrutiny by the Group's contract review committee involving specific functional departments, administrative departments, finance department and legal department, etc. of the Group in accordance with the Contract Management Rules; and
3. apart from the annual review by all independent non-executive Directors and external auditors of the Group to confirm that, among others, the Continuing Connected Transactions are conducted in according with the terms including the pricing principles set out in the relevant framework agreement, the Continuing Connected Transactions are also subject to review by the Supervisory Committee of the Company to ascertain whether such Continuing Connected Transactions are conducted under fair and reasonable terms and accordingly whether the interest of the Company will be affected.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Group will also, through the Group's monitoring mechanism and measures, endeavour to ensure that the annual caps of each Continuing Connected Transaction would not be exceeded:

1. There is work allocation for each unit of the Company in relation to management of continuing connected transactions and a leader and responsible person will be appointed for the management of continuing connected transactions.
2. In order to monitor the utilization rate of the annual caps, there is monthly reporting system with strict management and rigid control.
3. Each unit has to comply with the policy of the Company strictly for monitoring and inspection of the continuing connected transactions and issue warning when the utilization rate is close to the annual caps.
4. Compliance with the internal policy in relation to continuing connected transaction of the Company is taken into account in the economic assessment of each unit of the Company.

We concur with the view of the Board that there are adequate internal controls in place to ensure that the individual transactions are conducted within the 2020-2022 Framework Agreement.

RECOMMENDATION

Having taken the above principal factors and reasons, we considered that (i) the Non-Exempt Continuing Connected Transactions are in the ordinary and usual course of business of the Group; (ii) the terms of the 2020-2022 Framework Agreement each of the Non-Exempt Continuing Connected Transactions under are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; (iii) the entering into the 2020-2022 Framework Agreement (save for the Financial Services provided by the CSSC Group) is in in the interests of the Company and the Shareholders as a whole; and (iv) the Proposed Annual Caps (save for the Financial Services provided by the CSSC Group) are fair and reasonable.

Accordingly, we advise the Independent Board Committee to recommend, and we ourselves recommend, the Independent Shareholders, to vote in favour of the ordinary resolutions to be proposed at the EGM approving each of the Continuing Connected Transactions (save for the Financial Services provided by the CSSC Group) and the Proposed Annual Caps (save for the Financial Services provided by the CSSC Group) to be proposed at the EGM.

Yours faithfully,

For and on behalf of

Vinco Capital Limited

Alister Chung

Managing Director

Note: Mr. Alister Chung is a licensed person registered with the Securities and Future Commission of Hong Kong and a responsible officer of Vinco Capital Limited to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO and has participated in the provision of independent financial advisory services for various transactions involving companies listed in Hong Kong for over 10 years.

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As at 31 December 2019, the guaranteed bank borrowings of the Company were RMB1,820.00 million. There were a guarantee for RMB20.00 million by a member of the Group to another member of the Group, a guarantee for RMB500.00 million by a member of the Group to another member of the Group and another guarantee for RMB1,300.00 million by the Company to another member of the Group. Save as disclosed and after due and reasonable enquiries by the Directors, the bank borrowings are unguaranteed and unsecured.

At 31 December 2019, being the latest date for the purpose of ascertaining the indebtedness of the Group prior to the printing of this circular, the Group had lease liability of approximately RMB111.49 million and the lease liability payable in a year is approximately RMB52.15 million.

Save as aforementioned, and apart from intra-group liabilities within the Group and normal trade business, at the close of business on 31 December 2019, the Group did not have any other outstanding borrowings, loan capital issued and outstanding or agreed to be issued, debt securities issued and outstanding, and authorised or otherwise created but unissued, term loans, loans or other similar indebtedness, bank overdrafts, liabilities under acceptances (other than normal trade bills) or acceptable credits, debentures, mortgages, charges, finance leases, operating lease, hire purchase commitments, guarantees or other material contingent liabilities.

3. WORKING CAPITAL

As at the Latest Practicable Date, having made appropriate inquiries and taking into account of the financial resources available of the Group including the internally generated funds and present available banking facilities, the Directors are of the opinion that the working capital available is sufficient for the Group's requirements for at least 12 months from the date of this circular.

4. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

The Company is a large comprehensive marine and defense equipment enterprise group incorporating four sectors of maritime equipment being maritime defense equipment, maritime transport equipment, maritime development equipment and maritime expedition equipment. Currently, the Company has two major subsidiaries, namely GSI and Huangpu Wenchong, and their principal activities cover four major segments including defense equipment, shipbuilding, offshore engineering and non-ship business, with principal products of shipbuilding and marine products including military ships, special supporting ships, business ships, oil tankers, feeder container ships, ro-ro passenger ships, semi-submerged ships and polar module carriers, offshore platform, as well as non-ship products including steel structures and sets of electro-mechanical equipment.

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As a holding company, the Company currently focuses on asset operation and investment management. Its subsidiaries conduct independent production and operation and are engaged in manufacturing and providing customers with high-quality products through research and development of ships, seeking orders and implementing customised order production. The Company is mainly engaged in assembly and construction in the shipbuilding and offshore engineering industrial chain. It has extended to shipbuilding and offshore supporting products at the front end of the industrial chain and full life guarantee at the back end of the industrial chain.

In the first half of 2019, the Group recorded operating income of RMB7,816 billion and operating orders of RMB8,772 billion, down by 7.76% and 48.17% respectively compared with the corresponding period of last year. It was mainly affected by factors such as the downturn of shipping market, unsatisfactory orders and the relocation of the plant. Net profit attributable to the shareholders of the Company amounted to RMB391 million. Losses per share were RMB0.2764, and earnings per share after deduction of non-recurring gains and losses were RMB0.2985.

As civil shipping industry remained sluggish over the years, GSI incurred loss throughout the reporting period. The disposal of control over GSI will enhance the profitability of the Company to a certain extent, while further improving operating efficiency of the Company.

Upon the completion of the Disposal of GSI, the Company is still holding the remaining 46.3018% equity interests in GSI. The business scope of the Group will still include four major segments, namely defense equipment, shipbuilding, marine engineering and non-shipping operation. However, upon the disposal of control over GSI, the Company will no longer engage in production of oil tankers, passenger ro-ro ships and other vessel type. Subsequently, major products of the Group will include military ships, special ships and supporting ships, civil ships and other vessel type, marine engineering products such as marine platform and steel structure, as well as non-shipping products such as complete set of engineering equipment.

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1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Hong Kong Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. INTERESTS OF SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as is known to the Directors, the following persons (other than the Directors, Supervisors and chief executive of the Company) had or are deemed or taken to have an interest or short position in the shares and underlying shares which fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who were, directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at a general meeting of any member of the Group and were recorded in the register to be kept under section 336 of the SFO:

Note: L = Long position S = Short position P = Lending pool

Save as disclosed above, so far as is known to the Directors, as at the Latest Practicable Date, no other person (other than the Directors, Supervisors and chief executive of the Company) had, or was deemed or taken to have, an interest or short position in the shares or underlying shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group or held any option in respect of such capital.

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3. DIRECTORS' AND SUPERVISORS' INTERESTS

As at the Latest Practicable Date, none of the Directors, Supervisors and chief executive of the Company had any interest or short position in the shares, underlying shares or debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein or which had otherwise been notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers.

As at the Latest Practicable Date,

1. none of the Directors had entered into any existing or proposed service contract with any member of the Group, excluding those contracts expiring or determinable by the Group within one year without payment of compensation, other than statutory compensation; and
2. none of the Directors or their associates had any direct or indirect interest in any assets which had been, since 31 December 2018 (the date to which the latest published audited financial statements of the Group were made up), acquired, or disposed of by, or leased to any member of the Group, or proposed to be acquired, or disposed of by, or leased to any member of the Group.

4. COMPETING INTERESTS AND OTHER INTERESTS

So far as the Directors were aware, none of the Directors or their respective associates had any interests which competes or is likely to compete, either directly or indirectly with the business of the Group.

None of the Directors or their associates was materially interested in any contract or arrangement subsisting at the date of this circular which is significant in relation to the business of the Group.

5. EXPERT

The following is the qualification of the professional adviser who has given opinion or advice which is contained in this circular:

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As at the Latest Practicable Date, Vinco Capital

1. did not have any direct or indirect shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group;
2. has given and has not withdrawn its written consent to the issue of this circular with its letter of advice and the references to its name and logo in the form and context in which it is included; and
3. did not have any direct or indirect interest in any assets which had been, since 31 December 2018 (the date to which the latest published audited financial statements of the Group were made up), acquired, or disposed of by, or leased to any member of the Group, or proposed to be acquired, or disposed of by, or leased to any member of the Group.

The letter of advice from Vinco Capital is given as of the date of this circular for incorporation herein.

6. LITIGATION

At the Latest Practicable Date, no member of the Group was engaged in any litigation or arbitration proceedings of material importance and there is no litigation or claim of material importance known to the Directors to be pending or threatened by or against any member of the Group.

7. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2018, the date to which the latest published audited financial statements of the Company were made up.

8. MATERIAL CONTRACTS

The Group has entered into the following contracts (not being contracts entered into in the ordinary course of business) within two years immediately preceding the date of this circular and which are or may be material:

1. the agreement entered into by the Company and the GSI Investors on 26 February 2018 pursuant to which the Company conditionally agreed to acquire and the GSI Investors conditionally agreed to sell the GSI Equity Interests held by the GSI Investors through issue of 98,643,647 new A Shares at an issue price of RMB24.33 per A Share by the Company to the GSI Investors;

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1. the agreement entered into by the Company and the Huangpu Wenchong Investors on 26 February 2018 pursuant to which the Company conditionally agreed to acquire and the Huangpu Wenchong Investors conditionally agreed to sell the Huangpu Wenchong Equity Interests held by the Huangpu Wenchong Investors through issue of 98,643,648 new A Shares at an issue price of RMB24.33 per A Share by the Company to the Huangpu Wenchong Investors;
2. the equity transfer agreement entered into between the GSI, CSSC and China United Shipbuilding Company Limited* (華聯船舶有限公司) ("China United Shipbuilding") on 19 October 2018, pursuant to which GSI conditionally agreed to acquire, and CSSC and China United Shipbuilding conditionally agreed to dispose of, all the equity interest in Guangzhou Wenchong Dockyard Co., Ltd.* (廣州中船 文沖船塢有限公司) to GSI at a total consideration of RMB498,290,590.06;
3. the non-binding framework agreement ("Framework Agreement I") entered into between the Company and CSSC on 4 April 2019, pursuant to which the Company proposed to swap certain equity interests in Huangpu Wenchong and GSI currently held by the Company with 100% equity interests in Hudong Heavy Machinery Co., Ltd. * (滬東重機有限公司), 100% equity interests in CSSC Marine Power Co., Ltd.* (中船動力有限公司), 51% equity interests in CSSC Marine Power Institute Co., Ltd.* (中船動力研究院有限公司) and 15% equity interests in CSSC-MES Diesel Co., Ltd.* (上海中船三井造船柴油機有限公司) currently held by CSSC of the same appraised value;
4. the non-binding framework agreement entered into between the Company and CSSC Holdings on 4 April 2019, pursuant to which CSSC Holdings proposed to acquire the remaining equity interest in Huangpu Wenchong and GSI held by the Company following the assets swap as agreed in the Framework Agreement I at a consideration to be settled by issuance of new A shares of CSSC Holdings;
5. the relocation agreement entered into between Guangzhou Wenchong Properties Co., Ltd. ("Wenchong Properties") and Guangzhou Wenchong Shipyard Co., Ltd. ("Wenchong Shipyard") on 26 April 2019, pursuant to which Wenchong Properties agrees to pay to Wenchong Shipyard a total of RMB1,400 million (including RMB558 million as compensation for relocation and resettlement and RMB842 million as compensation for loss from shutdown) as the compensation for the relocation of Wenchong Shipyard from and handover of a parcel of land located at Wenchuan Road, Huangpu District, Guangzhou, the PRC owned by Wenchong Properties and the loss from shutdown;
6. the agreement entered into between the Company and CSSC Holdings on 7 August 2019, pursuant to which the Company conditionally agrees to sell and CSSC Holdings conditionally agrees to acquire 27.4214% equity interests (the "Sale Shares") held by the Company in GSI (the "Disposal Agreement");

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1. the supplement agreement to the Disposal Agreement entered into between the Company and CSSC Holdings on 16 September 2019, pursuant to which the parties conditionally agree to the final transfer consideration for the Sale Shares and new A Shares to be issued by CSSC Holdings to the Company in accordance with the Disposal Agreement for payment of the consideration for the Sale Shares;
2. the land resumption compensation agreement entered into between the GSI and GS Shipping Co., Ltd.* (廣州廣船船業有限公司) ("GS Shipping") on 18 November 2019, pursuant to which GS Shipping agrees to pay to GSI a total of RMB1,427 million as fees for GSI to proactively liaise with the relevant government authorities to facilitate the soil pollution control and contaminated soil restoration work of a land parcel located at 40 South Fangcun Main Road, Liwan District, Guangzhou ("GS Shipping Land") and the auction for part of the GS Shipping Land, so that the listing-for-sale of that part of the GS Shipping Land can be approved by the relevant government authorities and can take place before the end of 2019; and
3. the 2020-2022 Framework Agreement.

9. GENERAL

1. The registered office of the Company is located at 15th Floor, No. 137 Gexin Road, Haizhu District, Guangzhou, China, Post code: 510250.
2. The H share registrar and H share transfer office of the Company is Hong Kong Registrars Ltd. at Shops 1712-1716, 17th Floor, Hopewell Center, 183 Queen's Road East, Hong Kong.
3. The company secretary of the Company is Mr. Li Zhidong. Mr. Li Zhidong, aged 53, senior engineer. He graduated from Shanghai Jiaotong University with a bachelor's degree, majored in ship engineering, in engineering in July 1987 and obtained a master degree in November 1997. He served as head of general office, chief legal advisor, assistant to general manager, board secretary and secretary of Hong Kong company of Guangzhou Shipyard International Company Limited (廣州廣船國際股 份有限公司). He is currently secretary to the Board of the Company.
4. The following directors are directors or employees of the CSSC Group: Mr. Han Guangde is the chairman of the board of directors and the party secretary of Guangzhou Shipbuilding Industry Co., Ltd.* (廣州船舶工業有限公司); Mr. Chen Ji is the party vice secretary and general manager of Guangzhou Shipyard Co., Ltd.* (廣州造船廠有限公司); Mr. Shi Jun is the deputy manager of the asset management department of the CSSC Group. Save as disclosed above, so far as known to the Directors, as at the Latest Practicable Date, none of the Directors was a director or employee of a company which has an interest or short position in the shares and underlying shares of the Company which would be required to be disclosed under the provisions of Divisions 2 and 3 of Part XV of the SFO.
5. In the event of inconsistency, the English text of this circular shall prevail over the Chinese text.

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10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the offices of Deacons, the legal advisers of the Company on Hong Kong laws, at 5th Floor, Alexandra House, 18 Chater Road, Central, Hong Kong at during 9:00 a.m. to 5:00 p.m. on any day on which licensed banks in Hong Kong are open for ordinary business (excluding public holidays and Saturdays) from the date of this circular up to and including the date which is 14 days from the date of this circular:

1. the Articles of Association;
2. 2017-2019Framework Agreement;
3. Previous 2020-2022 Framework Agreement;
4. 2020-2022Framework Agreement;
5. the annual reports of the Company for each of the three years ended 31 December 2016, 2017 and 2018 and the interim report of the Company for the six months ended 30 June 2019;
6. the Material Contracts as referred to in paragraph 8 of this Appendix to this circular;
7. the letter of recommendation from the Independent Board Committee dated 5 February 2020, the text of which is set out on pages 45 to 46 of this circular;
8. the letter of advice issued by Vinco Capital, the Independent Financial Adviser, to the Independent Board Committee and the Independent Shareholders dated 5 February 2020, the text of which is set out on pages 47 to 81 of this circular;
9. the consent letter given by Vinco Capital as referred to in the section headed "Expert" in this Appendix;
10. the consolidated audited accounts of the Company and its subsidiaries for each of two financial years ended 31 December 2017 and 31 December 2018; and
11. this circular.

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